Elizabeth Frantz/Reuters
- Paul Krugman backed calls for the Fed to change its inflation target to 3% – but Mohamed El-Erian says there's little chance of that happening.
- The two economists voiced their views ahead of Fed chair Powell's speech at Jackson Hole on Friday.
- "It is very hard for a central bank to change an inflation target when it has been missing it so consistently," El-Erian said.
Paul Krugman thinks the Federal Reserve should bump up its inflation target to 3% – but Mohamed El-Erian says there's no chance.
The two economists' comments come ahead of Fed chair Jerome Powell's speech at the 2023 Jackson Hole Economic Symposium on Friday.
"I agree with Jason Furman's call for a 3% inflation target — the rationale for 2% has been overtaken by a couple of decades' experience (and many of us have been saying this for a while)," Nobel economist Krugman said in a post on X, citing a Wall Street Journal op-ed.
The Fed has been raising interest rates at the fastest pace since the 1980s over the past six quarters – from near zero to upward of 5% – in a bid to cool inflation down to its 2% target.
The aggressive tightening cycle has managed to slow down the annual pace of consumer-price increases from last year's highs above 9% to 3.2% through July, but investors are prepared for further rate increases this year as the central bank stays adamant on meeting its target.
Unlike others, Krugman has been bullish about the US economy in recent months. He has dismissed recession fears and reckons China's economic crisis won't spill over to the US.
"But I'm puzzled by his assertion that there's a lot of work still to do, and that the hardest part may still lie ahead. Most measures of underlying inflation are currently sitting around ... 3%," he said in a thread on X, referring to Furman's column.
"So if you think 3% is the right target, shouldn't we be declaring victory? Or to put it a different way, if 2% was a mistake, how many people should lose their jobs for a mistake?" Krugman added.
El-Erian, on the other hand, warned there's no chance the Fed will calibrate its inflation target even though it's a strong argument by some. "It is very hard for a central bank to change an inflation target when it has been missing it so consistently," El-Erian told CNBC on Monday.
"So yes, there's a theoretical argument for a higher inflation target, but don't look for chair Powell to touch that issue in any significant way," he added.