Posted on April 06 2012 – 1:11 PM – Posted by: Doug Brady
First, about inflation obsession: For at least three years, right-wing economists, pundits and politicians have been warning that runaway inflation is just around the corner, and they keep being wrong. Do you remember the tirades about “debasing the dollar” around this time last year? Do you remember the scorn heaped on Mr. Bernanke last spring when he argued that the bulge in inflation taking place at the time was just a temporary blip caused by gasoline prices and would soon recede? Well, he was right. At this point, inflation is once again running a bit below the Fed’s self-declared target of 2 percent.
Now, the Fed has, by law, a dual mandate: It’s supposed to be concerned with full employment as well as price stability. And while we more or less have price stability by the Fed’s definition, we’re nowhere near full employment. So this says that the Fed is doing too little, not too much. Indeed, some Fed officials — notably Charles Evans, the president of the Chicago Fed — have tried to make exactly that case.
To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.