The Federal Reserve should reconsider its policy to target a 2% annual inflation rate, a veteran monetary-policy scholar said Friday.
New research that the “real risk-free” rate of interest is now much lower around the world “highlight[s] the senselessness of blindly continuing to adhere to the 2% target inherited from the past,” said Benjamin Friedman, who has taught economics at Harvard University since 1972.
Friedman said there was a “paucity of serious empirical research” that went into identifying a 2% target in 2012.
This is “a professional embarrassment” to the central bank, he added.
“If there are any central bankers who are not offended yet, you have not been paying attention,” he told the audience at the American Economics Association meeting in San Diego.
The Fed is conducting a review of its policy framework, but Fed Chairman Jerome Powell has made clear that any change in the 2% target is not being considered.
Powell said he thought changing the target would confuse the public and not be credible.
“This argument is breath-taking in its thinness, it is also insulting to the mental capacity of the public,” Friedman said.
Many monetary-policy researchers, including top economists like former IMF Chief Economist Olivier Blanchard, have argued that pushing up the Fed’s inflation target would give the Fed room to raise its benchmark rate and reduce the likelihood of a repeat of the Great Recession, when Fed’s benchmark got stuck close to zero from 2008 until 2015.
At a separate AEA panel, Dallas Fed President Robert Kaplan voiced his support for a 2% target.
“I think the 2% target is a good target,” Kaplan said.
San Francisco Fed President Mary Daly said it was important for the Fed to stress that 2% wasn’t a ceiling for inflation.
She said she was worried about early evidence that investor expectations about inflation are moving lower. This could dampen consumption and weaken the economy, she said.
As a result, the Fed may need a new approach to boost inflation, Daly added.
Stocks sank Friday giving the escalating tensions in the Middle East. The S&P 500 index
fell by 23 points to 3,234.