Wednesday, July 24, 2019

Wenzel Questions the New York Federal Reserve Bank President On Inflation Targeting

John Williams 
I have just been informed that my questions to New York Federal Reserve President John Williams and his response will be published by Hoover Institution Press in a volume of the proceedings from this year’s Strategies for Monetary Policy conference which I attended and where I asked two questions of Williams. It will be in the volume under the section "Tying Down the Anchor: Monetary Policy Rules and the Lower Bound on Interest Rates." (To be published in 2020).

Here is the exchange:

Robert Wenzel: Hi. I’m Bob Wenzel with It’s a two-part question. The first part is in Paul Volcker’s memoir, he wrote, “I puzzle about the rationale. A two-percent target or limit was not in my textbook years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a two-percent inflation rate successfully maintained will mean the price level doubles in little more than a generation.”

Would you comment on that?

The second part of my question is, how high above the two percent target would you be comfortable with given current economic data?

John Williams:  So, first of all, the two percent just wasn’t pulled out of the air.

Obviously, part of the discussion both in the US and central banking across the world was a recognition of lower-bound type issues, measurement issues, where inflation is likely to be well below the measured value, and trying to get a good somewhere in between. In terms of our model, and you look at the work by Bernanke, Kiley and Roberts and the work that Dave Reifschneider and I have done, you don’t overshoot inflation by that much during the good times. It depends on the model and everything about it. But because you’re trying to get the mean inflation at two, you’re basically going to overshoot by a few tenths, not percentage points.

 And so, I think that some of the worries around average inflation targeting is, are you going to aim for three or four percent during good times? In fact, at least, based on the historical experience, you’re talking about a relatively few tenths. Let me give you a concrete example. Last ten years, core inflation in the US has been running about 1.6% on average despite the worst recession of our lifetimes. So, that gives you an idea that even in that case, inflation, the miss on inflation isn’t that huge, even in that sense.



  1. I'm not sure I heard a justification for a 2% target (as opposed to 1%, 3%, or whatever).

  2. They are worried about interest rates being set so low that they have little room to react to downturns.

    Their measurement issues are really issues with their models.

    Then he gets into how much to aim high and even though they have been shooting low, they’re not doing too bad.