California Democrat Ro Khanna Questions Fed's 2% Inflation Target: 'Why Is It Sacrosanct As Opposed To Setting It At 3%'

Rep. Ro Khanna (D-CA) has questioned the Federal Reserve's 2% inflation target which the central bank has been targeting and defending vehemently in the wake of widespread calls for the need to have a re-look.

“Who set the Fed's 2% target rate? Why is it sacrosanct as opposed to setting it at 3% given the modern need for strategic reshoring, decarbonization, and wage increases for the working class? Would love Econ Twitter to chime in why we can't land the plan[e] softly at 3%,” Khanna said in his tweet.

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Fed Chair Jerome Powell has defended the inflation target in the past saying how it has helped anchor price rises. In his semi-annual testimony before the Senate Banking Committee in March, Powell asserted it’s really important to stick to the 2% inflation target and not consider changing it.

“..the modern belief is that people’s expectations about inflation actually have a real effect on inflation. If you expect inflation to go up 5% then it will,” he said, according to a Reuters report.

Even during last week's testimony before the Committee on Financial Services, Powell said the Fed remains committed to bringing inflation back down to its 2% goal and to keeping longer-term inflation expectations well anchored.

Brad Gerstner, CEO of Altimeter Capital, responded to Khanna's tweet saying there's nothing magical about 2% vs. 3% and that the Fed knows it. “At 3% we inflate away the debt a bit faster, but the Fed can't adjust the target without a big risk to credibility – which could spike the cost of future gov't borrowing. So "jawbone but tolerate" seems like a good balance,” he said in his tweet.

Expert Take: Given where the economy is and taking into account the current circumstances, many others, too, hold the same view as Khanna. Experts like Allianz chief economic adviser Mohamed El-Erian have argued that the central bank's inflation target should be updated.

“We are now living in a world of supply constraints and if we were to formulate a new inflation target, it will be higher than 2% — it will be more like 3%,” El-Erian had said.

Treasury Secretary Janet Yellen, however, noted it was not the appropriate time for such a debate. "We could have a lovely debate for what the inflation target would be," Yellen said last week. "But this is not the time for that debate."

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