Odds of a higher inflation target just went up

It looks like Janet Yellen will be the next Fed vice chairman.

Yellen has been clear on her position about a higher target rate of inflation.  While I'm no expert in macro, I think arguments in favor of a higher inflation target, ranging from Mankiw, Rogoff and Scott Sumner and on the right of the political spectrum and Yellen, Delong, Blinder, Krugman and others on the left of the political spectrum, are very well thought out.  A lot of this thinking comes from experience with Japan in the 1990s.  Arguments on the other side seem, in my reading, grounded in some kind of strange philosophical ethos rather than hard-headed analysis of theory and evidence.

In a nutshell, the main reasons for a higher inflation rate are two-fold:

1) A higher long-run inflation target might give the current Fed a little more power to stimulate an economy still stuck at the 'zero lower bound' of short-term interest rates.

2) A higher long-run inflation target will cause steady-state nominal interest rates to rise, which, in the future, will give the Fed more room to maneuver above the zero lower bound.

While this will probably be slow, gradual, and accompanied by heated debate, I think odds that the Fed's inflation target will trend up toward 3 percent over the next five years just increased considerably.

If markets see the same thing I do, I would imagine these expectations by themselves might help to speed along the recovery.

Comments

  1. Just found your blog and I wonder about the header picture. It has no agriculture and very little economics. What does it signify?

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