The Fed Needs To Tolerate Inflation

A blog about business and economics.
Aug. 25 2012 1:48 PM

We Need Inflation-Tolerance, Not Inflation

People sometimes characterize me as thinking that more inflation would help the American economy. I think it might, perhaps, within limits. But what I really think is that more tolerance of inflation would help the economy, not the inflation itself. I've got an analogy that perhaps can help explain the difference.

Imagine you're watching an Olympic-quality archer who's having a very bad day. You notice that not only is his overall score much worse than he normally does, but all of his arrows are falling lower than the bullseye. You ask him about it and he tells you that his daughter's been kidnapped, and the kidnapper says he'll kill the girl if he shoots a single arrow above the bullseye. Now it all makes sense. The archer hasn't lost his skill. He's deliberately aiming too low because he has enormous aversion to shooting above the bullseye. If he lost that aversion, his score would improve.


The moral of the story isn't that shooting too high is a good way to win an archery tournament. To win, you need to hit the bullseye—neither too high nor too low. But if you become strongly averse to shooting too high, that's going to undermine your ability to hit the bullseye.

That's the situation I think American monetary policy is in. It's not that three or four percent inflation is such a wonderful goal. It's that extreme aversion to three or four percent inflation is causing the Federal Reserve to persistently "shoot too low" in terms of aggregate demand. Ben Bernanke's acting as if someone's holding his daughter hostage. Specifically, the reigning dogma is that if inflation were to go from 2 percent to 3 or 4 percent that long-term expectations might become "unanchored" and drift higher and higher, undermining the "hard won gains" of the Volcker years. But there's no empirical evidence that this is true, and no particularly strong theoretical reason to believe than the worst-case scenario if inflation tolerance goes wrong is worse that the current strategy of grinding the recession out by letting America's long-term productive capacity collapse.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


Medical Examiner

Here’s Where We Stand With Ebola

Even experienced international disaster responders are shocked at how bad it’s gotten.

Why Are Lighter-Skinned Latinos and Asians More Likely to Vote Republican?

A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

The XX Factor
Sept. 22 2014 12:29 PM A Woman Who Escaped the Extreme Babymaking Christian Fundamentalism of Quiverfull

Subprime Loans Are Back

And believe it or not, that’s a good thing.

It Is Very Stupid to Compare Hope Solo to Ray Rice

Building a Better Workplace

In Defense of HR

Startups and small businesses shouldn’t skip over a human resources department.

How Ted Cruz and Scott Brown Misunderstand What It Means to Be an American Citizen

Divestment Is Fine but Mostly Symbolic. There’s a Better Way for Universities to Fight Climate Change.

  News & Politics
Sept. 22 2014 6:30 PM What Does It Mean to Be an American? Ted Cruz and Scott Brown think it’s about ideology. It’s really about culture.
Sept. 22 2014 5:38 PM Apple Won't Shut Down Beats Music After All (But Will Probably Rename It)
Dear Prudence
Sept. 23 2014 6:00 AM Naked and Afraid Prudie offers advice on whether a young boy should sleep in the same room with his nude grandfather.
  Double X
The XX Factor
Sept. 22 2014 7:43 PM Emma Watson Threatened With Nude Photo Leak for Speaking Out About Women's Equality
  Slate Plus
Slate Plus
Sept. 22 2014 1:52 PM Tell Us What You Think About Slate Plus Help us improve our new membership program.
Sept. 23 2014 7:14 AM Fighting the Sophomore Slump, Five Novels at a Time Announcing the Slate/Whiting Second Novel List.
Future Tense
Sept. 22 2014 6:27 PM Should We All Be Learning How to Type in Virtual Reality?
  Health & Science
Bad Astronomy
Sept. 23 2014 7:00 AM I Stand with Emma Watson
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.