Maintaining inflation near 2 percent is important because it provides consumers and businesses with certainty. It's like a yardstick -- if people are counting on it to be 36 inches long, being an inch short is as bad as being an inch over.
Borrowers and lenders, for example, need to know how much a dollar will be worth when the time comes to pay it back. Below-target inflation punishes borrowers by making it more expensive than expected to pay off their loans.This is completely crazy. Central banks are premised on maintaining low stable inflation.
Persistently low inflation can also lead the public to expect more of the same. This makes interest rates look higher when the effect of inflation is taken into account -- a phenomenon that hurts the Fed's ability to help the economy by lowering rates.
The problem is not low stable inflation under 2%. This is not causing economic malaise.
The issue is insufficient effective demand. Firms are reticent to invest even at historically low interest rates because of lagging demand for their products.
In addition, the world is experiencing the end of a long commodity bubble as China rebalances and Europe wrestles with the effects of a flawed currency union.
With "experts" like this, we are so screwed.
The Fed Must Attack Low Inflation
Narayan Kocherlakota | Lionel W. McKenzie professor of economics at the University of Rochester, and president of the Federal Reserve Bank of Minneapolis from 2009 through 2015