You may have heard or seen some economists and financial bloggers pushing the idea that the Fed should allow inflation to rise “just a little bit” in order to improve the employment outlook, but today Reuters reported that former Federal Reserve Chairman Paul Volcker put the kibosh on that, saying "that is kind of a doomsday scenario":
WASHINGTON (Reuters) - The U.S. economy is recovering "pretty well" and trying to juice it up by allowing a little extra inflation would be disastrous, Paul Volcker, the former Federal Reserve chairman known for successfully reining in double-digit inflation, said on Wednesday.
"I think that is kind of a doomsday scenario," Volcker told an economic summit when asked if the Fed should foster higher inflation to stimulate faster growth.
Higher inflation would backfire by causing interest rates to rise. "You are not going to get any stimulus and you are going to make it much harder to restore price stability," Volcker told the Atlantic magazine conference.
Some economists have speculated that the Federal Reserve might allow inflation to exceed the central bank's 2 percent target in an attempt to lower the unemployment rate, still stubbornly high at 8.3 percent.