Some in Federal Reserve Think 2% Inflation Goal Ultimately Has Room to Change

After several bank closures, potentially more banking instability in the wings, a debt limit crisis, a stubborn labor market, and inflation that doesn’t seem to be in a hurry to exit the stage, the Federal Reserve is trying to manage through a lot of uncertainty. That includes what the long-term inflation rate should be as well as whether a pause in interest rate hikes will happen in June.

In the released minutes from the May Federal Open Market Committee, the talk was repeatedly about getting inflation back down to the long-touted 2% target. In the 12 pages, the figure came up 14 times, with repeated mentions of the extent to which “additional policy firming may be appropriate to return inflation to 2 percent over time” and “All members affirmed that they are strongly committed to returning inflation to their 2 percent objective.”

But the fixation on 2% inflation has been increasingly questioned, especially last fall as one voice after another suggested that a slightly higher figure would offer more room for monetary policy to be effective. While the figure for the Fed has previously provided a point of public solidarity, there are cracks in the surety and support within the organization.

Reuters has noted that in interviews a couple of presidents at Federal Reserve regional banks have begun to question the position as always inviolate, although no one is suggesting an immediate change.

“Could we revisit that? Sure. But we can’t revisit it until we get inflation back to 2%,” Minneapolis Fed President Neel Kashkari told Reuters in a recent interview.

In addition, Federal Reserve Bank of Philadelphia President Patrick Harker, in comments after an April 20 speech, also seemed to leave open the possibility of a future change. When asked about whether 2% was appropriate, Reuters reported him saying “we’re not changing it right now” and then continuing, “We have to do what we said we are going to do” which was return to the 2% inflation position.

Such a change would move against the position other central banks have taken and would also cause significant reconsideration of strategies in virtually every market.

Current economic challenges also help put other comments in the May minutes into context, with a growing question of whether June will bring a pause in interest rate hikes.

“Many participants focused on the need to retain optionality after this meeting,” the minutes read. “Some participants commented that, based on their expectations that progress in returning inflation to 2 percent could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings.” However, others said that, at the time, if events continued to move along economic outlooks, “further policy firming after this meeting may not be necessary.”

As the Associated Press reported, the resolution might be a “skip” in which there would be no increase in June, but wording that the FOMC would consider future increases if inflation didn’t come closer to the current 2% target.