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Does the Federal Reserve Want to Increase Inflation?

Janet Yellen, president of the San Francisco Federal Reserve, wants to see a bit more inflation than the Fed has been allowed in recent years. Rather than the historically low 1.5 percent target the Fed has recently hewed to, she wants a solid 2 percent. The Wall Street Journal explains:

Yellen worries that the world economy is becoming more volatile. After a quarter-century of relatively steady growth, it has now gone through a series of shocks. The Fed needs to be able to respond to those shocks with its standard tool — sharp interest rate cuts to stabilize growth. But if inflation is very low and thus interest rates are very low, that leaves it little room to operate when shocks hit. A slightly higher inflation would give it more room to operate.

In other words: Higher inflation would give the Federal Reserve more capacity to kickstart the economy by lowering interest rates. And the Fed worries that it'll have to kickstart the economy quite a bit in the coming years.

By Ezra Klein  |  June 8, 2009; 10:36 AM ET
Categories:  Federal Reserve , Solutions  
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Comments

"Higher inflation would give the Federal Reserve more capacity to kickstart the economy by lowering interest rates."

More QE? Geithner's already been laughed out of China, keep this up and he'll be laughed out of DC.

Posted by: shooter242 | June 8, 2009 11:00 AM | Report abuse

shhoter--that's not what she's saying. There's been an active voice for inflation closer to 3% per annum then the 1-1.5% we've been seeing due to the zero rate bound. Most thought that if the recovery from 2001 got going the Fed would move up its inflation target.

Posted by: endaround | June 8, 2009 11:14 AM | Report abuse

Isn't she getting it exactly wrong? If the inflation target is higher, that means they can keep interest rates lower for longer. Then, when the economy takes a dive, there is less room to work through cutting rates. What am I missing?

Posted by: BobWallace | June 8, 2009 11:59 AM | Report abuse

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