Next year’s unpleasant choices confronting the Fed
Central bank might stick officially to 2% inflation target but, in practice, pursue a higher one
SIGNALLING the pursuit of an objective while quietly heading in a different direction is a tactic in politics that is as old as it gets. Now the US Federal Reserve may be forced to consider such a tricky manoeuvre as 2023 unfolds. This is not because it is an optimal approach. Far from it.
Rather, the Fed may end up seeing it as better than the other main options, now that it has fallen well behind an inflation process that is likely to prove stickier than many currently expect, including the central bank.
Since 2012, the Fed has been publicly and explicitly committed to a 2 per cent inflation target. The 2 per cent objective originated in New Zealand in 1990 and gradually spread to several other advanced countries. The target was deemed high enough to allow for the price adjustments needed for the economy’s desirable resource reallocations, while avoiding the zero lower bound trap where, it was thought, interest rates can no longer be cut further to stimulate the economy. And it was deemed low enough to stabilise inflationary expectations.
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