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I agree with Jim on this.
There’s an additional problem with raising the inflation target from 2 percent a year to 3 (or even 4, as some economists have proposed). If the Fed decides it’s too painful to reach 2 percent — even with unemployment low — how is its new target going to have any credibility? I wrote about this danger a few years ago:
Let’s say inflation hits 5 percent. How much credibility would the Fed have in pledging to do what it takes to hit its new 3 percent goal? Speculation that it would settle for 4 would be widespread. To convince markets that the Fed really means what it says would then require extra tightening. The Fed would be left with the same painful choice it faced in the late 1970s: Let inflation keep drifting higher, or stop it through, well, a brutal recession.
