The Fed’s 2 percent inflation target is under fire from Wall Street lawmakers

The Fed’s 2 percent target rate for consumer inflation is under scrutiny from economists, lawmakers and investors, who have all expressed skepticism not only about whether 2 percent inflation is desirable in a post-pandemic economy but even if it is possible.

“I doubt that [Federal Reserve] “And then the question is, what can we do or what can the administration do from a regulatory standpoint that will take the edge off?” said Senate Banking Committee member Tom Tellis (RN).

“I don’t think that structurally it can just be set-it-and-forget-it with some numbers closer to 5 percent at the end of the day,” he said, referring to the Fed’s expected interest rate level for 2023, which has been revised upward. to 5.1 percent as the Federal Reserve raised interest rates by another 50 basis points on Wednesday.

Senate Commerce and Transportation Committee member Roger Wicker (R-Mais.) called the 2 percent inflation target “unrealistic.”

“It’s likely to be much higher,” Thursday said.

Senior figures on Wall Street are making similar statements, arguing that 2 percent inflation isn’t worth the pain of a recession it would take to get there.

I don’t think the Fed can bring inflation back to 2% without a deep recession that destroys jobs. Even if it returns to 2 percent, it will not remain stable there in the long term. Acceptance [plus or minus] An inflation rate of 3 percent is the best strategy for a strong economy and job growth over the course of [long term]hedge fund manager Bill Ackman wrote online on Wednesday.

The Fed’s inflation target of 2 percent is no longer credible. Declining globalization, the transition to alternative energy, the need to pay workers more, and less risky, shorter supply chains are all inflationary factors. The Fed cannot change its objective now, but it will likely do so in the future.”

Rep. Raul Grijalva (D-Ariz.) said Thursday that the prospect of a new acceptable level of inflation is something the Fed should be open to, adding that this was a topic he had been discussing with colleagues.

“I think for a while [it’s] Grijalva said. “The target should be 2 per cent, but we figured ourselves out some flexibility and some breathing room [wouldn’t be] Error.”

Federal Reserve Chairman Jerome Powell dismissed the idea of ​​accepting anything over 2 percent as the inflation rate for consumers during his press conference on Wednesday.

“Changing our inflation target is just something we wouldn’t think about, something we wouldn’t think about,” he said. “We have an inflation target of 2 percent, and we will use our tools to bring inflation back to 2 percent. I think this is not the time to think about that.”

However, Powell wavered slightly on this point as he spoke to reporters.

“There might be a long-term project at some point,” he said, before quickly adding, “We wouldn’t consider that under any circumstances.”

Economist Joseph Stiglitz said he felt guilty about the Fed’s steady rate hike for starting the quantitative tightening program too late.

Central bankers said, “We got behind the ball in not addressing inflation” when in fact it wasn’t their fault. It was supply-side inflation, not demand-side inflation, Stiglitz said during an event hosted by the Roosevelt Institute on Thursday. I describe it as a psychiatrist, but they feel guilty and feel they have to show their determination, show their manhood, and act aggressively.”

The reason some economists believe that the Fed will not be able to lower prices simply by raising interest rates is that current inflation has more to do with profit levels of large firms than with wage costs.

Higher interest rates make things more expensive to buy, which slows economic activity and encourages companies to fire workers. This reduces overhead so that they can still turn a profit while charging less for their products.

But if prices are higher simply because firms have been able to demand more money from customers due to their increased power over markets and changing what consumers will be charged, then this reasoning does not hold.

This is the state in which a growing number of economists say the economy is now.

Unit labor cost figures for the United States [show] Non-financial corporate profits grow faster than labor costs. In fact, the profits are hers [grown] Faster than labor costs for seven of the past eight quarters, as have prices [grown] faster than labor costs for seven of the past eight quarters. “Today’s inflation is more about margin expansion than labor costs,” UBS economist Paul Donovan wrote in a note to investors last week.

“What was clear was that there was a significant increase in profit margins,” Stiglitz said Thursday. “We don’t know in the end whether these brands will decline.”

Stiglitz said that 2 percent as an acceptable level of inflation has no basis in economic theory but has simply become a conventional benchmark.

“Not only is there no magic in 2 percent, there is no magic in the timescale to get back to 2 percent. So even if you believe in 2 percent as a magic formula, there’s nothing to say we have to go back to 2 percent in Within a year or four years.

On Wednesday, Telles said prices could eventually fall back to 2 percent inflation on their own.

“You might eventually do it naturally,” he said.

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