Third, the Fed should make real the idea that its inflation target is symmetric by being clear that in the late stage of prolonged expansion with low unemployment it is comfortable with inflation rising a little bit above 2 percent with the confidence that it will decline when the next recession comes. The Fed does not expect inflation to reach 2 percent until 2018 and the gradient is not steep. So it should be clear that until inflation expectations look to be rising above 2 percent there is no need to restrain the economy.
This is the third of four points he raised in his presentation to the Dallas Fed. It is probably not the most important point by his lights. I pick up on it just because it fits with a point I have been pushing for a while.
People are not comfortable with this idea, for various reasons. And yet people are comfortable with the idea that inflation will probably end up above 2%. It seems the debate often boils down more to why than if. I like my why, and Summers’.