Should Federal Reserve officials meet expectations and raise interest rates next week, they will be doing so over the objections of some high-profile experts, including one who used to work for the central bank.
A coalition of economists released a letter Friday urging the Fed to change the criteria it uses to make decisions. Specifically, the group, called “Fed Up,” is advocating for a higher inflation rate target than the current 2 percent level. Among its members is former Minnesota Fed President Narayana Kocherlakota.
Raising the target, the economists argue, will allow the economy to grow further, whereas a steady diet of rate hikes to stave off inflation could choke growth and cause another recession.
Josh Bivens, the director of research at the Economic Policy Institute, said in a conference call that allowing inflation to run higher will provide the Fed some policy cover when the next downturn hits, where it could keep policy looser for longer.
“The last decade should have shown us that the political system severely controls the tools that policymakers have to fight recessions,” he said. “I see the higher inflation target as one of these buffers.”
Indeed, the Fed has come under a great deal of political scrutiny as it has sought to engineer the economy away from the Great Recession that ended in June 2009. The central bank kept its target funds rate near zero for seven years before gingerly adding three quarter-point hikes since December 2015.