I just noticed this article by the FT’s Sam Fleming, in which he writes that Boston Fed President Eric Rosengren has pointed out the potential benefits of raising the US inflation target. The implication being – as Blanchard, Krugman and others have pointed out – that we now know booms and busts are big enough that the old one can send rates to the zero bound. And aside from that, we suspect that the equilibrium real rate – also crucial in determining how far above zero the central bank rate lives – will be lower than before for the foreseeable future.
This is a big day for the raise the inflation target campaign because Rosengren is the first real life actual policymaker to express this view. Granted, he doesn’t have a vote on FOMC this year. But he will get one later. This could say more about the latitude Fed members feel to express blue-sky views than the chance of it ever happening, but still.
It nevertheless seems unlikely from a realcentralbankpolitik perspective. Bernanke’s quantification of the vague ‘price stability’ mandate as a target was a bold enough step. Raising it might stretch the consistency of the target with the Fed’s mandate for ‘price stability’ too far in the eyes of Congress. And trigger a ‘while we are at it’ fundamental review of their goals and perhaps even operations. (Don’t forget the AudittheFed nonsense).
A target raise would not be entirely inconsistent with Fed goals. The Fed has a dual mandate, the other item involving full employment. Raising the target would lead to greater inflation stability (sounds a bit like price stability) but lead to smaller deviations from full employment, if that means fewer and less protracted periods spent at the zero bound. And less recourse to unconventional monetary policy tools might appeal to economic conservatives in Congress, who view such things (falsely) as signs of meddling with capitalism, rather than (as they should) attempts to fix it.
Lurking here is who should have the right to set Fed targets. I favour myself the UK system, in which the Government sets the target, and the central bank is delegated the task of pursuing it. In the academic literature this is known as giving the central bank instrument independence but not goal independence.
Right now, in the US, with the debate about economics – particularly fiscal policy – being so bonkers in Congress, one shudders at the thought of them having the freedom to write the Fed’s targets as the UK Government does here. [The Chancellor – our finance minister – can simply change the target when it suits by writing a letter.] But then the long run legitimacy of delegating powers to the central bank – which is more in doubt in the US than it has been for some time – may be better served, eventually, by a UK-style split of responsibilities.