Treasury Secretary Scott Bessent suggested the U.S. might rethink the Federal Reserve’s official inflation target of 2% once inflation is consistently back at that level. Instead of one fixed number, the target could become a range—like 1.5% to 2.5%—to allow more flexibility.
Important Points:
Proposed Change: After reaching 2% inflation, discuss switching from a fixed 2% target to a range (e.g., 1.5%-2.5% or 1%-3%).
Timing is Crucial: This discussion must only happen after inflation is firmly back at 2% to maintain the Fed's credibility and avoid looking like the goalposts are being moved for convenience.
Admitting Current Pain: Bessent acknowledged Americans are "hurting" from high prices, which he blamed on the Biden administration, but noted inflation is now falling.
Link to Budget Deficit: He argued that stabilizing or reducing the government's budget deficit would help lower inflation and could justify lower interest rates in the future.
Historical Model: He pointed to pre-euro Germany as an example, where the central bank would lower rates in exchange for the government maintaining responsible fiscal policies, suggesting the U.S. could adopt a similar, more cooperative approach.
Critique of Past Fed Policy: While supportive of emergency measures like Quantitative Easing (QE) during crises, Bessent criticized the Fed for continuing its large-scale asset purchases for "much, much too long."
Key Takeaway
The Treasury Secretary is laying the groundwork for a potential major shift in how the U.S. manages inflation, advocating for a more flexible target range and closer coordination between government spending (fiscal policy) and central bank interest rates (monetary policy) once the current inflation fight is over.
