Fed Official Wants to Allow Price Inflation to "Run Hot"

Eric Rosengren

The president of the Federal Reserve Bank of Boston, Eric Rosengren, said he favors the central bank moving from using interest-rate policy to achieve 2% inflation to a regime that targets a range of price pressures, reports The Wall Street Journal.


“It appears that the 2% inflation goal has essentially acted more like a ceiling” for price rises, Rosengren said in the text of a speech presented Monday at Davidson College in North Carolina.

“We might be forced to accept below-2% inflation during recessions, but we would commit to achieving above-2% inflation in good times, so as to provide more policy space to counteract the next recession,” Rosengren said in the prepared remarks.

This is an absolutely nutty monetary policy perspective, though it is growing among Fed officials. It is neo-Keynesian nonsense that holds the Fed must control aggregate demand in the economy via the control of interest rates and that price inflation should run high during good times so that the Fed has a lot of room to cut interest rates during a downturn in the Fed-manipulated business cycle.

It holds an implied belief that the Fed is limited in its ability to supply money into the economic system when short-term low-risk interest rates are near zero.

This is simply not the case. Further, there is no need for interest rate or money manipulation in an economy in the first place.

Keynesian macro theory has gone from being very bad theory to theory that has little to do with the planet earth. Basic fundamentals such as the role of time preference as part of the interest rate along with the expected price inflation component are simply not taken into consideration, nor it even seems that manipulating interest rates to different levels at different times has different impacts on money supply growth is recognized or understood.

-RW