Philip Jefferson, Speech: Recent Inflation and the Dual Mandate

Inflation

“In summary, core goods inflation has started to come down. Several indicators suggest that housing services inflation is likely to come down in the coming months. There is more uncertainty surrounding inflation in core services excluding housing. Over time, we’ll learn more about inflation dynamics in this sector.”

“Often, the FOMC must balance competing risks given its dual mandate of promoting maximum employment and stable prices. In the current context, there is, on the one hand, the risk that monetary policy will not be sufficiently restrictive to bring inflation back to 2 percent over time, and on the other hand there is a risk of policy being too restrictive and unnecessarily increasing the likelihood of recession. In the face of this latter risk, some economists argue that a higher inflation target is better than the Fed’s current 2 percent target rate.11 Changing the FOMC’s longer-run inflation objective, however, would introduce an additional risk by calling into question the FOMC’s commitment to stabilizing inflation at any level because it might lead people to suspect that the target could be changed opportunistically in the future. If so, then these reputational costs will undermine the key benefits of well-anchored longer-run inflation expectations discussed above: an increased ability of monetary policy to fight economic downturns without sacrificing price stability. Moreover, if the purpose of a higher inflation target is to increase the ability of the central bank to deal with the severe recessions that follow financial crises, then a better strategic approach might be to rely on more vigorous supervisory and macroprudential policies that could help reduce the likelihood of such events. Further, seeking an inflation rate in the vicinity of 4 percent or higher would certainly stretch the meaning of “stable prices” in the Federal Reserve Act.”