Federal Reserve Chairman Jerome Powell and his colleagues may be willing to accept inflation rising as high as 2.5 percent as they seek to extend the almost nine-year economic expansion.
So say a number of veteran Fed watchers who argue that the central bank’s Federal Open Market Committee would tolerate a moderate rise in inflation above its 2 percent goal after years of falling below that objective. Powell delivers his first testimony to Congress as Fed chief on Feb. 27 and March 1.
“I’ve had some hawks on the committee surprise me and say they wouldn’t be worried about a modest overshoot” as long as it’s below 2.5 percent, former Fed governor Laurence Meyer said, without identifying who those anti-inflation stalwarts were. Inflation currently is 1.7 percent.
That suggests investors’ fears that U.S. central bankers will react aggressively to signs of stirring price pressures are misplaced. Meyer, who now heads consultants Monetary Policy Analytics in Washington, does see the Fed raising interest rates four times this year -- one more than policy makers projected in December -- but said that’s likely the limit.
“Two and a quarter percent inflation isn’t going to scare anybody” at the Fed, said Roberto Perli, a partner at Cornerstone Macro LLC in Washington, who sees three rate hikes this year. “Two and a half percent is kind of the boundary,” the former Fed economist added.
Powell appears before the House Financial Services Committee at 10 a.m. on Feb. 27, with his prepared remarks scheduled for release at 8:30 a.m., and the Senate banking panel on March 1. At his formal swearing-in ceremony on Feb. 13, the central bank’s new chief said policy makers had made “great progress” toward achieving their twin goals of full employment and stable prices.
Some Fed officials have already voiced a willingness to see inflation rise above their objective.
“Let me be clear: A small and transitory overshoot of 2 percent inflation would not be a problem,” William Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 11 speech. “Were it to occur, it would demonstrate that our inflation target is symmetric, and it would help keep inflation expectations well-anchored around our longer-run objective.”
Speaking at Bloomberg Business event on Feb. 21, Minneapolis Fed President Neel Kashkari suggested that the central bank should tolerate above-target price rises for a while.
“We’ve been around 1.5 percent inflation for the last five or six years,” he told Bloomberg Television’s Michael McKee after the event. “If we really are serious about a symmetric 2 percent target then we should be equally comfortable -- or uncomfortable -- with 2.5 percent inflation for the next five years.