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Is It Too Late to Fix the Low Inflation Target?

If the Fed had to set its inflation target today, it would choose 3% or 4%, rather than 2%, but “it is very difficult to change a target when you have missed it for so long. ... The minute you do that, your credibility is hit even harder.”

By John McCorry, Tom Keene & Jonathan Ferro | February 14, 2023 at 03:00 PM

Wall Street’s reaction to Tuesday’s consumer price index (CPI) shows investors are realizing inflation is likely to remain higher than the Federal Reserve’s goal for longer. Two heavyweight market voices say the 2 percent target is part of the problem.

“Back in the day, they should’ve said 3 percent instead of 2 percent,” Kenneth Rogoff, a professor at Harvard University and former Fed economist, told Bloomberg Television Tuesday. “If you change it, it means you might change it again. Inflation they’re going to allow to be elevated for longer, but they’re going to say it’s going to get back to 2 percent, it’s just taking longer. That will be the rhetoric.”

 

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