Opinion | The Fed Should Carefully Aim for a Higher Inflation Target   

The Federal Reserve has appropriately focused on a single objective for a year and a half: getting inflation down. While the war isn’t won, and I fear the hardest battles may be ahead, it is necessary to think about what victory would entail. In the short run, the Fed should be aiming to stabilize inflation below 3%. If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025.

If the Fed were adopting an inflation target from scratch, it would likely choose a target above 2%. A higher target inflation rate has costs, especially the time and attention people spend trying to account for how much their current dollars will be worth in a year or 10. But a higher target also has the benefit of helping cushion the economy against severe recessions. When the economy slows, higher inflation means that price hikes and wage freezes can become a less unpalatable alternative to widespread layoffs for business looking to cut costs. Higher inflation also helps the Fed stimulate investment, because any given nominal borrowing cost becomes less onerous when businesses can count on future price increases to meet it.

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