STATEMENT: Fed’s June Rate Hike Bolsters the Case for Reassessing Its 2 Percent Inflation Target, Says CAP Economist Michael Madowitz

Washington, D.C. — Today, the Federal Reserve announced its intent to raise interest rates by 0.25 percent, or 25 basis points. The announcement arrives after the Federal Open Market Committee (FOMC) met yesterday and today in Washington.

Last week, economists from the Center for American Progress joined with a group of more than 20 prominent economists in endorsing the Fed Up coalition’s call for a rethink of the Fed’s 2 percent inflation target. With growing evidence that neutral interest rates have fallen, that the costs of recessions are higher than previously thought, and that central bankers are averse to overshooting inflation targets, an update to a decade-old policy is a step the Fed should take now. The economists also argued that changing this approach will have little effect on the Fed’s future credibility.

In response to the interest rate hike, CAP economist Michael Madowitz released the following statement:

Today’s rate increase is disappointing. Absent any sign of increased inflation, the FOMC elected to raise the policy rate, which is likely to slow the growth of real wages and employment. Instead of reacting to phantoms, the Fed should take the important step of reconsidering its inflation target.

As several prominent economists have pointed out, evidence that neutral interest rates have fallen, and that developed economies have greater difficulties in generating growth in aggregate demand, argues for reassessing the 2 percent target. Such a reconsideration is especially important when tighter labor markets and real wage growth would deliver much-needed help to many households.

For more information or to speak with an expert, contact Allison Preiss at apreiss@americanprogress.org or 202.478.6331.