Halister News

(Bloomberg) -- Fed’s 2% inflation target made sense when adopted in 2007, yet is “too low now” due to volatile business cycle, greater risk of deflation, and drop in natural real fed funds rate, BofAML economist Ethan Harris wrote in note Wed.

• In addition, “perceived probability” of hitting zero lower bound “is much higher”
• Fed would likely want to overshoot 2% in this cycle because inflation expectations are starting to slip, policy makers need more ammunition to deal with next global crisis, and inflation may need to go above 2% when economy is “hot” in order to average 2%
• “One could quibble with each of these arguments,” yet BofAML sees “strong case for overshooting or raising the target”
  • Changing target creates “big political and credibility challenges for the Fed”; “a temporary overshoot would be much easier”