by Michael S. Derby

(Reuters) – Two U.S. Federal Reserve (Fed) officials recently said they were open to a review of the U.S. central bank’s medium-term inflation target of around 2%, even though the road to a debate, or even a revision of this rate, is strewn with pitfalls.

“Could we re-examine that? Sure, but we can’t do that until inflation comes back to 2%,” Minneapolis Fed Chairman Neel Kashkari said in an interview with Reuters on Monday.

As soon as the Fed gets inflation down to 2%, “then we could debate what should be the right target,” he added.

At the end of April, Patrick Harker, the president of the Philadelphia Fed, also hinted that the 2% target could be reviewed at some point.

“We won’t change it now,” he added, however, also suggesting that might be the case in the future.

The objective of a price change around 2% was set in 2012, leading the Fed to officially conduct a monetary policy based around this rate.

Changing this target would be difficult, as Fed officials have strongly defended it since its adoption.

During the press conference following the Fed’s monetary policy decisions of 21 and 22 March, the president of the American central bank, Jerome Powell, spoke out against a modification of this objective and underlined that the firm commitment of the institution in favor of this rate of 2% contributed to strengthening confidence in price stability despite the current inflationary pressures.

However, Jerome Powell has himself committed to a review of the Fed’s operating framework every five years, which means that a review of the current inflation target could take place in 2025, after the revision of 2020.

The 2% target is debated as the median forecast by Fed officials in March gives inflation still slightly above 2% at the end of 2025.

A MAJOR CHALLENGE

In the years following the adoption of the 2% target, inflation was consistently below this rate, leading some economists to support the idea that raising this ceiling would boost expectations of higher prices and would help bring real inflation closer to the desired threshold.

Today, as inflation remains more than double the target despite 14 months of sharp interest rate hikes, some observers believe that raising the target would reduce pressure on the Fed. for it to maintain a restrictive monetary policy, at the risk of significant damage to the labor market.

Many observers also believe that the most easily acceptable measures to curb inflation have come to an end and that the final stages of reaching the 2% target risk leading to a veritable economic catastrophe.

“It’s not going to be easy to get to the 2% target and it could be very difficult for the Fed to say ‘we have to get to the 2% target and we’re going to keep interest rates very high. ‘”, warns Olivier Blanchard.

The former chief economist at the International Monetary Fund (IMF) and current researcher at the Peterson Institute for International Economics points in particular to possible collateral damage with the maintenance of such an objective.

Tuesday, at a conference organized by the Brookings Institution, Olivier Blanchard, who pleads for an inflation target of 3%, said he expected a debate as to the relevance of maintaining the rate of 2% as soon as the inflation will approach this threshold.

He added that the Fed could now be less aggressive in raising its rates to reach its target of 2% in view of the possible damage to the economy.

Ben Bernanke, the former head of the Fed, said he shared Olivier Blanchard’s point in “theory”. He noted, however, that in practice no change would be possible without the approval of the US Congress.

According to Ben Bernanke, recourse to US parliamentarians could lead to an objective that the Fed itself might not want.

“Given our current situation compared to the initial position, it is a real challenge to make this change,” he concluded.

(Report Michael S. Derby; Claude Chendjou)

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