"Fed's Inflation Target Raised to 3% Would Create 1.2 Million Jobs Annually"

Peterson Institute for International Economics Advocates Raising Fed Inflation Target from 2% to 3%

Jerome Powell, Chair of the U.S. Federal Reserve (Fed) [Photo by EPA Yonhap News]

[Asia Economy Reporter Byunghee Park] There has been a claim that the U.S. central bank, the Federal Reserve (Fed), needs to raise its inflation target for monetary policy from the current 2% to 3%.

According to major foreign media on the 16th (local time), the Peterson Institute for International Economics recently argued in a report that raising the Fed's inflation target could generate significant employment creation effects and improve overall economic conditions.

The report was authored by David Wilcox and David Leipziger, both of whom have past experience working at the Fed. Wilcox served as a research director at the Fed, and Leipziger acted as a special advisor during Janet Yellen’s tenure as Fed Chair and later as Treasury Secretary.

In the report, they emphasized, "During the first 15 years after raising the inflation target, the unemployment rate would consistently decrease by at least 0.75 percentage points," adding, "This implies an additional employment effect of about 1.2 million people annually." They also diagnosed that such employment creation effects would extend to marginalized groups, helping to resolve various inequalities related to race and other factors.

The Fed has been known to operate monetary policy targeting a 2% inflation rate at least since 1996. However, the Fed officially announced the 2% inflation target at the Federal Open Market Committee (FOMC) meeting in January 2012 during Ben Bernanke’s chairmanship. Nevertheless, due to successive economic crises, achieving the 2% inflation target proved difficult, resulting in the Fed’s benchmark interest rate remaining near zero for an extended period. This limited the Fed’s room to respond to recessions through rate cuts and ultimately led to the use of unconventional monetary policy tools such as quantitative easing.

Wilcox and Leipziger argued that raising the inflation target would allow the Fed to raise its benchmark interest rate and enable more flexible monetary policy responses. They also emphasized that it could enhance the effectiveness of interest rate cut policies.