Fed’s Kocherlakota Says Inflation Target May Have to Rise

Minneapolis Federal Reserve President Narayana Kocherlakota is generally considered a deficit and inflation hawk who mostly opposes both economic stimulus and increases in inflation above the Fed’s “around 2%” target. But last night following a speech in North Dakota, Kocherlakota said that the Fed may have to consider letting inflation rise more in order to combat current high levels of unemployment.

The Wall Street Journal reports this morning that in answer to a question following his speech, Kocherlakota said:

“In a context, in a world, where unemployment is as high as it is,” allowing inflation to tip over the current central bank target of 2% “could well be part of an appropriate policy,” Kocherlakota said. The central bank may have to “give a little bit on the inflation front to do better on the employment front,” although importantly, the central banker didn’t predict this scenario will come to pass.

He also noted that further stimulus by cutting rates would likely have only a “minimal” impact on the U.S. economy.

That Kocherlakota would be the first Fed president to say such a thing is quite a story. More dovish Fed presidents have supported additional easing as a way to jump-start the economy again, but we do not recall any who has called for raising the inflation target. Some liberal economists, with Paul Krugman being the most notable, have suggested letting inflation rise to something in the 3% to 4% range in an effort to lower the unemployment rate. Needless to say, deficit and inflation hawks have gone apoplectic at the mere thought of a higher inflation target.

But now that Kocherlakota has let the cat out of the bag, a higher inflation target might be seriously discussed. Notice the “although importantly” in last phrase in the quote above? That was an editor’s addition, and if we don’t see an editorial tomorrow morning condemning the very idea of a higher inflation target then the sun will likely rise in west on Saturday.

Paul Ausick