As the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.

By SUDEEP REDDY at WSJ

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The rationale is that getting inflation up even temporarily would push “real” interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.

“It’s a big mistake,” said Allan Meltzer of Carnegie Mellon University, a central bank historian. “Higher inflation is not going to solve our problem. Any gain from that experience would be temporary,” adding that the economy would suffer later.

They say Fed policy already is weakening the dollar and as a result prompting a gold and commodity boom. “The Fed is treading upon a mine-laden path that has never been tip-toed through in this country,” said Andrew Busch, a currency strategist at BMO Capital Markets.

FULL STORY

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