Peter Morici: Why the Fed should ditch its 2% inflation target

The Federal Reserve is charged by Congress to accomplish full employment and stable prices.

For economists, these objectives pose a tradeoff, and the Fed targets 2% inflation as a compromise.

All this is premised on economic theories rendered obsolete by the globalization of many goods and services markets, capital mobility, and resulting wage arbitrage.

The Phillips Curve postulates that as unemployment falls, workers get more bargaining power and push up wages and prices. Economists believe near-zero inflation is not sustainable because as average inflation gets too low, prices for discretionary items such as new cars and dry cleaning could actually fall — this would make businesses in those industries reluctant to invest, and plunge the economy into recession.

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