The Fed Should Be Careful When it Wishes for More Inflation

What makes Fed policy makers so sure that they could bring inflation rates back down again?

by Caroline Baum
Market Watch

The Federal Reserve has been trying, without much success, to raise the inflation rate to its 2% target ever since the central bank designated an explicit target in 2012.

Both actual inflation, as measured by the personal consumption expenditures price index, and inflation expectations remain depressed.

To help it achieve its inflation objective, the Fed is considering changes to its monetary policy framework including the adoption of something called average inflation targeting. Under an AIT regime, instead of targeting 2% inflation over the medium term, the Fed would aim for inflation above 2% to offset periods of undershooting its goal.

What if those targets were met — or exceeded? Is the Fed confident that it can generate a little more inflation without producing a lot more, sacrificing its hard-fought credibility in the process?

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