Wednesday, August 1, 2012

Palley on the Fed’s 2% inflation target trap

Thomas Palley

The Federal Reserve has now openly adopted a two percent inflation target, with both Chairman Bernanke and the Federal Open Market Committee publicly committing to holding inflation at that level. Though not a problem today, this two per cent target represents a policy trap that will undercut the possibility of future wage increases despite on-going productivity growth. That promises to aggravate existing problems of income inequality and demand shortage.

The Fed’s new policy is tactically and analytically flawed. Tactically, at this time of global economic weakness, the Fed should be advocating policies that promote rising wages rather than focusing on inflation targets. Analytically, its inflation target is too low and will inflict significant future economic harm.

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