Central banks around the world are pivoting toward easier monetary policy. In some countries this means rates are falling below previous record lows, and in the U.S. the Federal Reserve has paused a rate-hiking campaign and now appears more likely to lower rates than raise them further. Unfortunately, there is little evidence to suggest that lower and lower policy rates are successfully generating either better real growth outcomes or higher inflation.
Yet in pursuit of their 2% inflation target, major central banks seem willing to exhaust monetary policy “ammunition” at a time when economic output is at – or above – potential. In some countries, this policy stance has the potential to reduce monetary policy effectiveness, create imbalances that may sow the seeds for the next crisis, and leave central banks powerless to respond to that crisis. Perhaps it’s time to ask whether the 2% inflation target has outlived its usefulness.