Perspective: The biggest economic story of the year is the Federal Reserve rethinking its inflation target
Federal Reserve Chairman Jerome H. Powell testifies at a Senate Banking Committee hearing Feb. 26 on Capitol Hill. By Matt O'Brien Matt O'Brien Reporter covering economic affairs Email Bio Follow Reporter March 5 at 9:00 AM The Federal Reserve is finally starting to wrestle with the fact that what it’s doing isn’t working.
Now, in theory, this doesn’t have to be that big an issue because there are other ways to help the economy when interest rates are zero. In practice, though, it is something we need to worry about because those other ways don’t seem to be nearly as effective. Or at least they aren’t with the way the Fed does things now. Which is why the Fed getting ready to undertake an official rethink of it.
Why this disconnect between what the Fed has said and what it has done? The answer seems to be that, while the Fed doesn’t mind if inflation accidentally goes over 2 percent for a little while, it’s far less comfortable with actively trying to make it do so. It’s worried, in other words, that trying to push inflation above its 2 percent target might destabilize that target in such a way that whatever short-term boost we got wouldn’t be worth the long-term hit to its credibility.
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