The Federal
Reserve has begun preparing the public and markets for higher inflation,
but has left unanswered the question of how high inflation might go and
for how long?
A
new research paper from economists at the Fed's Washington-based Board
of Governors suggests that policymakers should allow prices to rise by
around 3.0 percent annually during periods of high economic growth, so
that the long-run average annual target of 2.0 percent inflation is
achieved after several years of lower inflation.
Keeping interest rates low while inflation spikes, presumably with output and wages also rising above potential, would "make up" for the accumulated effects of the long downturn in growth and inflation in the past decade.
Fed staff research does not necessarily reflect the views of board members or directly impact policy, but in this case it is relevant to an ongoing debate over how the Fed should react as inflation nears the central bank's target.
The personal consumption expenditure index, the Fed's preferred inflation measure, has averaged just 1.6 percent over the last decade, prompting some support for a period of higher inflation in hopes that wages and interest rates may rise as well.
Fed Chair Janet Yellen last week, and a group of regional reserve bank presidents this week, signalled the Fed would not try to halt inflation at 2.0 percent, but only shift gears if above-target prices rises appear "persistent."
"Two percent is not a ceiling," Chicago Federal Reserve bank president Charles Evans said in New York this week. "If you always worry about spending time above 2.0 percent, that’s smelling and tasting and looking like a ceiling – and I think that’s something you have to actively fight.”
The papers on inflation and other topics, prepared by top Fed and other economists for an annual Brookings research conference, showed that even as economic conditions become more normal the Fed is continuing with a deep re-evaluation of economic conditions following the 2007-2009 financial crisis.
Keeping interest rates low while inflation spikes, presumably with output and wages also rising above potential, would "make up" for the accumulated effects of the long downturn in growth and inflation in the past decade.
Fed staff research does not necessarily reflect the views of board members or directly impact policy, but in this case it is relevant to an ongoing debate over how the Fed should react as inflation nears the central bank's target.
The personal consumption expenditure index, the Fed's preferred inflation measure, has averaged just 1.6 percent over the last decade, prompting some support for a period of higher inflation in hopes that wages and interest rates may rise as well.
Fed Chair Janet Yellen last week, and a group of regional reserve bank presidents this week, signalled the Fed would not try to halt inflation at 2.0 percent, but only shift gears if above-target prices rises appear "persistent."
"Two percent is not a ceiling," Chicago Federal Reserve bank president Charles Evans said in New York this week. "If you always worry about spending time above 2.0 percent, that’s smelling and tasting and looking like a ceiling – and I think that’s something you have to actively fight.”
The papers on inflation and other topics, prepared by top Fed and other economists for an annual Brookings research conference, showed that even as economic conditions become more normal the Fed is continuing with a deep re-evaluation of economic conditions following the 2007-2009 financial crisis.
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