While speculation is spreading that the Bank of Japan may increase its bond-buying program, with the dual goals of increasing economic activity and filliping the rate of inflation to 2 percent, influential members of the money establishment are asking “Is 2 percent inflation high enough?”
Eric Rosengren, president of the Fed Boston branch, in a recent speech said the inability of central banks to spur economic recovery may imply that inflation targets have been set too low.
Olivier Blanchard, chief economist at the IMF, thinks there is an emerging willingness among policy makers to “revisit the issue,” i.e., consider a higher inflation target than 2%. As the New York Times notes, the notion of 2% inflation “. . .for more than a generation has been treated as all but written in stone.”
But, if 2% is not high enough, what is the ideal target rate?
Laurence Ball, an economist at Johns Hopkins University, proposed in a 2013 paper that central banks should adopt 4 percent inflation targets. “It is not clear,” he wrote, “what target is ideal but 4 percent is a reasonable guess. . .”
Lawrence Summers, former Treasury secretary, argues that the developed world may have entered a period of “secular stagnation.” If so, adds John Williams, president of the San Francisco Fed branch, it might become necessary for the Fed to consider raising its 2 percent target.
Former Fed Chairman Ben Bernanke recently said, at an IMF event, “I don’t see anything magical about targeting 2 percent inflation.”
While there are a few lone wolves warning against higher target rates, they are crying in the wilderness. Calls for a higher rate of inflation, which means more quantitative easing because interest rates cannot be lowered, will create an environment for greater interest in gold and silver, the time proven hedges against excessive money creation.