[Column] The US Inflation Target Raise Debate That Brings the 'Stop-and-Go Nightmare'

"2% is our inflation target and it will be maintained going forward."

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), dismissed calls to raise the inflation target in a single statement at the U.S. Jackson Hole meeting held from the 24th to the 26th. Prior to the Jackson Hole meeting, a debate had emerged in the U.S., mainly among academics, about raising the current 2% inflation target to 3%. The argument was that due to concerns over a hard landing caused by excessive tightening, the inflation target itself should be raised to halt tightening altogether. Powell’s remarks are welcome in that they put an end to the inflation target increase debate, which would have come with greater costs. If the monetary authorities, who have declared war on inflation, suddenly change their target in the middle of the battle, more severe side effects than a hard landing are to be feared.

First, inflation could rise again. Over the past year, the Fed has succeeded in calming U.S. consumer prices to 3.2% last month through aggressive tightening, but such a change could reignite inflation. If the Fed raises the inflation target, inflation expectations will rise, real interest rates will fall, and the economy will be stimulated again. Core consumer prices, which show the underlying trend of inflation, still stand at 4.7%, significantly exceeding the Fed’s target. On top of that, food and gasoline prices are rebounding, making the battlefield a minefield.

Another reason is that the credibility of central bank monetary policy could be damaged. It could create the perception that the target is flexible. There is no guarantee that opinions won’t arise later questioning why 3.5% or 4% targets are not acceptable.

Above all, it could have a significant impact on the economies of neighboring countries, including South Korea. Countries will likely move to meet their targets as the U.S. does, and domestic inflation will also rebound, with the burden falling on the people. If the U.S. inflation target revision causes the dollar’s value to fall, major U.S. trading partners are likely to follow suit with currency devaluations. While depreciating the won to increase exports is an option, concerns over foreign capital outflows cannot be ignored. A difficult situation could unfold in many ways.

Christine Lagarde, President of the European Central Bank (ECB), said at this Jackson Hole meeting, "You should not change the rules in the middle of the game." Raising the inflation target can be done after inflation control is complete without being too late. The Fed, in the 1970s, raised (Go) and lowered (Stop) interest rates, which fueled inflation, and in the 1980s, raised interest rates to as high as 20% per annum. It is time not to forget the 'Stop and Go' nightmare from over 40 years ago.

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