---
title: "Deciding whether \"high interest rates\" will continue? Market hotly debates the focus: Should the Federal Reserve raise its inflation target?"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/95784067.md"
description: "The theoretical basis for a 2% target has been replaced by decades of experience. Is raising the inflation target the right solution?"
datetime: "2023-08-22T01:58:38.000Z"
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---

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# Deciding whether "high interest rates" will continue? Market hotly debates the focus: Should the Federal Reserve raise its inflation target?

In the context of high interest rates, whether the Federal Reserve should raise its inflation target has become a major focus of the market recently. However, this debate actually revolves around the important question of whether the Federal Reserve needs to raise interest rates again.

There is disagreement within the Federal Reserve regarding future interest rate hikes. New York Fed President Williams believes that "inflation has already declined significantly and current interest rates are already very high," while Fed Governor Bowman supports further interest rate hikes.

In response to this, many analysts and economists point out that the real issue is that the current inflation target is too low, and raising the inflation target is the correct solution.

## Debate within the Fed on whether to continue raising interest rates

There is significant disagreement among Federal Reserve officials regarding whether to continue raising interest rates.

According to The New York Times, New York Fed President Williams believes that "the current U.S. economy is already very close to the highest interest rate, and the pace of price increases may slow to around 2.5% by the end of the year," which is roughly close to the Federal Reserve's 2% target.

His view sharply contrasts with that of Fed Governor Bowman, who expressed his opinion separately at the "Fed Listens" community event, insisting that inflation remains high and the economy continues to grow, thus necessitating further interest rate hikes.

It is worth noting that the Federal Reserve has already raised interest rates by a quarter percentage point at its July meeting, and most Fed officials expect another rate hike before the end of the year.

However, recent data shows that the pace of inflation slowdown is faster than expected, and many analysts predict that a trend of "deflation" may be forming. Contract investors linked to the Federal Reserve's policy rate are betting that there will be no further interest rate hikes and expect the Fed's next move to be a rate cut in the first few months of next year.

## Is raising the inflation target the correct solution?

There is a growing call to raise the inflation target in the current interest rate debate.

Jason Furman, professor at Harvard University and former chief economic advisor to the Obama administration, has proposed shifting to a higher inflation target, with the target range for inflation rates between 2-3%, and reemphasizing the task of price stability. Jason Furman believes:

> The previous 2% target was set in the late 1990s, and there are doubts about whether this target is still suitable for the new economic environment.
> 
> ![Jason Furman](https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/b1587eee-9ed5-4931-a8ac-698d12891cbd.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg)

Nobel laureate Krugman expressed agreement with Furman's views on Twitter, stating that the theoretical basis for the 2% target has been replaced by decades of experience. Krugman pointed out:

> Most indicators measuring underlying inflation are currently around 3%. If 3% is the correct target, shouldn't we declare victory? Or to put it another way, if 2% is a mistake, how many people should lose their jobs because of one mistake?
> 
> ![Krugman](https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/d32c00cf-7b79-450f-bc62-05bc369a9875.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg) Previously, it was pointed out that Allianz's chief economist, El-Erian, believes that the inflation targets for the United States and the United Kingdom in the next five to ten years should be closer to 3%. **If the Federal Reserve focuses too much on the 2% inflation target, it could lead to an economic recession.**

El-Erian expects that Powell will eventually have to establish a new target interest rate closer to 3% than the current 2%. El-Erian believes that if the Federal Reserve sticks to the 2% inflation target, there may be another interest rate hike in September, but if the target inflation rate is raised, July will be the last interest rate hike.

Even within the Federal Reserve, similar views have been expressed. In February of this year, a research report published by the Cleveland Fed stated that the FOMC's unemployment rate path would lead to core PCE inflation reaching 2.75% by 2025. However, to achieve the 2% inflation target, a severe recession is necessary.

## Dilemma in policy choices

The Federal Reserve faces a dilemma in policy choices regarding the potential increase in the inflation target.

Gita Gopinath, Deputy Managing Director of the International Monetary Fund (IMF), previously warned that central banks around the world must accept an "unsettling fact," which is that they must tolerate inflation rates above the 2% target for a longer period of time to avoid a financial crisis caused by interest rate hikes.

Gopinath said that policymakers face a difficult choice: either address the future financial crisis of heavily indebted countries or raise borrowing costs to curb stubborn inflation.

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