- The St. Louis Fed president said it would be a disaster for the Fed to abandon its inflation target.
- The Federal Reserve has been aggressively raising interest rates to bring inflation down to 2%.
- But the rate hike has fueled fears that the economy could cool too much and slip into a recession.
A Fed official said abandoning the central bank’s 2% inflation target would be a “disaster” amid widespread backlash against an aggressive rate hike cycle. could slow the economy too much.
St. Louis Federal Reserve Bank Governor James Bullard said, “We have a mandate enacted by Congress and the President to maintain stable prices for the American economy. It’s in the law.” Presentation to Greater St. Louis Inc. “We defined price stability as 2% inflation. This is an international standard developed in the 1990s. I think it would be a disaster to abandon that standard.”
Bullard even warned that if the Fed gave up fighting inflation, it would “go back to the 1970s.”
he was referring era of high inflation By March 1980, it had risen to nearly 15%. The price shock was due to several factors, including the 1973 oil crisis and the Vietnam War. The Fed then aggressively set inflation targets, and in the 1990s he adopted a 2% inflation target.
U.S. central bank explains Its website says its long-term 2% inflation target is most consistent with its mandate of “maximum employment and price stability”.
Inflation — measured by Personal consumption expenditure — Reached 5.4% in January, well above the 2% target and spurring the Fed to raise rates. benchmark interest rate It rose from 4.75% to 5% for the ninth consecutive time last week.
Brad’s comments are Former Treasury Secretary Larry Summers, In January, he said the economy could suffer 1970s-style inflation if the Fed abandoned its 2% inflation target.
Summers told the World Economic Forum, “It is a costly mistake to assume that any concessions to the inflation target will help, and ultimately have negative effects in spectacular ways in the 1970s.” wax.
The Fed is also sticking to its message of keeping inflation down to 2%. “We are working to restore price stability and all the evidence shows that the public is confident that we will, and will bring inflation down to 2% over time.” At the press conference last Wednesday, according to the transcription.
Not everyone is on board with the idea.
But not everyone agrees with the Fed.
economists such as Mohamed El-Erian and Billionaire investor Bill Ackman The United States has argued that the inflation target should be raised to avoid an excessive slowdown in the economy.
Bank of America economist Ethan Harris wrote in a December report that there is little evidence that a 2% inflation target is the “best target.” luck. “There is evidence that a steady 4% inflation has very little additional cost compared to a steady 2% inflation. Either way, the economy will adapt,” Harris added.
Renowned economist Ann Pettifor correctly predicted the global financial crisis 2006, He also accused the central bank of waging “class warfare” to crush inflation with higher interest rates.
The Fed is eyeing ‘supercore inflation’.
The criticism comes at a time when inflation remains stubbornly high despite relentless rate hikes by the Fed.
America Personal consumption expenditure rate It rose to 5.4% in January. This is slightly higher than his 5.3% in December, but still lower than his 6.1% with 5.6% in November and October respectively.
Most of the decline was due to lower energy prices, and Mr. Bullard said he “doesn’t want to live and die in international commodity markets.”
That’s why the Federal Reserve (Fed) tracks supercore inflation closely. This is to better handle the situation, excluding volatile food, energy and housing prices.
Higher interest rates make borrowing more expensive, like borrowing from a mortgage to a credit card. And it encourages people to save more than they spend, which theoretically helps keep prices down. but, Takes time to feel the effects And the risk is that as demand shrinks, central banks will raise interest rates to a point where the economy will slow and even tip into recession.