The Federal Reserve may be wrestling with an inflation problem, but two former senior staffers at the U.S. central bank argue that continued higher prices in the future may be what is needed to shift the whole economy to a higher plateau and deliver a jobs boom that helps the broadest set of people.
David Wilcox, a former Fed research director, and David Reifschneider, a special adviser to former Fed Chair Janet Yellen, argue in a new research paper that once the coronavirus pandemic passes and the Fed is able to raise interest rates to more normal levels, it should then increase the national inflation target from 2% to 3% and use a shock treatment of surprise rate cuts to hit it.
“The unemployment rate could average 0.75 percentage point or more below its sustainable level during the first 15 years after the higher target is announced,” representing about 1.2 million or more additional people employed each year, the two economists, now with the Peterson Institute for International Economics, estimated.
“To the extent that people drawn into the labor market when it is tightest come from marginalized groups,” they wrote, allowing higher inflation “could also help reduce racial and other inequities” by keeping people in jobs longer and allowing them to get more experience and training.
