Tuesday , October 22 2019
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Do your job or resign

Summary:
Reuters has an article discussing the views of Kansas City Fed President Esther George on the Fed’s inflation target: In fact, she suggested, inflation could sink to well below the Fed’s 2% target and she might remain unfazed. “I find it more realistic to accept that there will be both temporary and persistent fluctuations around this long-run target and, as long as they don’t exceed a reasonable threshold — perhaps as big as 50 or even 100 basis points — they should be tolerated, depending on broader economic conditions,” she said. That view is at odds with concern expressed by much of the Fed leadership over years of missing the central bank’s 2% inflation goal. If that’s her view, then she should resign. It’s fine to oppose the 2% inflation target.  If I were at the Fed I’d

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Reuters has an article discussing the views of Kansas City Fed President Esther George on the Fed’s inflation target:

In fact, she suggested, inflation could sink to well below the Fed’s 2% target and she might remain unfazed.

“I find it more realistic to accept that there will be both temporary and persistent fluctuations around this long-run target and, as long as they don’t exceed a reasonable threshold — perhaps as big as 50 or even 100 basis points — they should be tolerated, depending on broader economic conditions,” she said.

That view is at odds with concern expressed by much of the Fed leadership over years of missing the central bank’s 2% inflation goal.

If that’s her view, then she should resign.

It’s fine to oppose the 2% inflation target.  If I were at the Fed I’d argue for changing the 2% inflation target to a 4% NGDP level target.  But as long as the 2% inflation target is official Fed policy, FOMC members have an obligation to try to achieve the target.  George’s views are not acceptable.

This is one reason why level targeting is superior to inflation targeting.  It forces everyone at the Fed to buy into the official policy.  Unfortunately, growth rate targeting allows Fed officials to advocate instrument settings that result in inflation rates that are consistently below target.

This is also wrong:

Kansas City Federal Reserve Bank President Esther George on Sunday rejected the notion that the U.S. central bank should cut interest rates to try to boost low inflation, which she said is largely a result of global forces that U.S. monetary policy can do little to counter.

Argentina, Zimbabwe, Venezuela, Turkey and many other countries have no trouble creating inflation despite “global forces.”


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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