US 'Inflation 2% Skepticism' Spreads... "If Target Not Raised to 3%, Hard Landing Expected"

If Fed Continues Aggressive Tightening
Significant Impact Possible on Consumption and Employment
Powell "No Consideration to Change Target"

Among U.S. politicians and economists, there is a growing argument that the Federal Reserve (Fed) should raise its inflation target. The claim is that insisting on a 2% inflation target and continuing with aggressive tightening could cause significant shocks to the U.S. economy, including consumption and employment, so the Fed should consider raising the target to 3% to achieve a soft economic landing.

On the 22nd (local time), The Wall Street Journal (WSJ) reported that skepticism is spreading about how much longer tightening must continue to return inflation to the 2% range.

WSJ stated, "The Fed is considering one more rate hike this year to bring inflation down to the 2% target," adding, "With most of the work to lower inflation already done, the central bank’s strategy to fight in the final stage is expected to have potentially large and painful effects on consumers, markets, and the economy."

In the same vein, some economists and politicians argue that the inflation target should be reset to 3%. They contend that the U.S. economy should not be sacrificed by being trapped in the '2% dogma,' even at the cost of consumption and employment. Adam Posen, president of the Peterson Institute for International Economics, said, "The inflation target does not represent an absolute rule," and warned, "We should certainly be cautious about destroying the economy to bring inflation down from 3.5% to 2.25%."

The U.S. consumer price inflation rate peaked at 9.1% in June last year and fell to 3.2% by July this year. This was the result of the Fed raising interest rates 11 consecutive times from near zero (0?0.25%) in March last year to 5?5.25%.

The Fed set this inflation target during Chairman Ben Bernanke’s tenure in 2012. Under his predecessor, Chairman Alan Greenspan, there was no specific target. Although Congress emphasized the Fed’s duty to achieve 'price stability,' Greenspan did not define this term with a specific figure, which made it easier for the Fed to lower rates to stimulate the economy even if inflation was higher than expected. However, the situation changed when the inflation target was set in 2012.

In politics, there are also calls to raise the inflation target to help President Joe Biden’s administration succeed in next year’s reelection. Ro Khanna, a Democratic member of the U.S. House of Representatives from California, criticized, "The 2% target is not science but their (Fed’s) political judgment," and said, "I don’t understand why a specific number is treated as the holy grail for sound judgment."

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). [Image source=Yonhap News]

However, despite these arguments, the Fed has clearly stated it will not revise the inflation target. Fed Chair Jerome Powell has maintained the position that "under no circumstances will we consider changing the inflation target." He emphasized during his congressional testimony in March this year, "Now is not the time to start discussions about change."

If the Fed raises the inflation target, market confidence in policy could decline. Thomas Barkin, president of the Federal Reserve Bank of Richmond, said, "If you unilaterally declare that you cannot achieve the target you set, it is tantamount to saying the target itself is unreliable." He added, "Just two and a half years ago, inflation was 2%. Inflation at 2% is not an impossible idea that no one can achieve. In fact, it is something we have achieved for a very long time."

Some also predict that the 2% inflation target can be reached without major pain. Susan Collins, president of the Federal Reserve Bank of Boston, recently said in an interview, "The path to a soft landing seems to have widened." This is interpreted to mean that inflation could return to 2% within two years without a significant economic shock under current conditions.

This content was produced with the assistance of AI translation services.