U.S. Treasury Secretary Scott Bessent supports reconsidering the Federal Reserve’s 2% inflation target, provided that the United States can consistently bring the rate of price increases down to that level.
“Once we get back to 2 – and I think that’s just around the corner – we can discuss: Is it smarter to set a range?” Besant said in an interview on the All-In podcast. “Once we refocus on the target, we can discuss the range issue.”
In an interview released on December 22, Besant said that the focus of the discussion might be to raise the interest rate from 1.5% to 2.5%, or from 1% to 3%. He said, “There is still very in-depth discussion to be done in this regard.”
Fed policymakers formally adopted the current 2% inflation target in 2012, a goal that has been embraced by many central banks around the world. Bessenst pointed out that “the certainty down to one decimal place is simply absurd.” But he noted that adjusting the target when inflation is above this level could give the impression that “as long as inflation is above a certain level, it can always be raised.”
This interview was conducted after the release of the November consumer price index (CPI) on December 18th, which showed that the CPI rose by 2.7% compared with the same period last year. The Federal Reserve uses another indicator, the so-called personal consumption expenditures (PCE) price index. The latest data shows that the PCE rose by 2.8% in the 12 months ending in September.
Bessenet said, “It’s hard to get back on your feet before you reach your goal and maintain your credibility.” He also acknowledged the family’s concerns about the ability to purchase a home – an anxiety that was exposed in the non-periodic election held in November, in which the Republicans suffered a defeat.
The finance minister said, “We understand that the American people are suffering.” He said that the price level “has already been very high” and blamed the Biden administration for the soaring prices. He believes that inflation is now “beginning to fall back”, partly due to the decline in rents, which he believes was driven up by the surge in illegal immigration.
Although some economists believe that the latest CPI report may have measurement errors due to the furlough of federal government workers during the government shutdown in October and early November, Besant said he believes “this figure is quite accurate.” He pointed out that although the prices of some items, including energy, have risen, real-time data shows that these prices are falling.
Besant also pointed out that stabilizing the budget deficit can provide a reason for lowering interest rates. He cited the example of Germany before the birth of the euro, when the Bundesbank agreed to “increase fiscal space” and lower interest rates in exchange for the government pursuing a “reasonable fiscal balance” that was not extravagant.
“Large-scale asset purchases should definitely be included in the central bank’s policy toolkit,” he said. He also supported the Fed’s use of emergency powers to aid strategic industries when necessary and said that the collapse of the aviation industry during the pandemic “isn’t good for anyone.” As for the broader so-called quantitative easing policy, “I think it has lasted too long.”
