Trump's potential Federal Reserve nominee wants a 0% inflation target

REUTERS/Jason Reed

• Potential Federal Reserve nominee Judy Shelton said she would be in favor of an inflation target of 0%, adding that it would offer stable price signals in the economy.
• The Federal Reserve currently targets 2% inflation, a level officials see as optimal for the economy.
• Economists say that a 0% inflation target would leave the Federal Reserve with fewer tools to help the economy in the event of a downturn.

Conservative economist Judy Shelton, who has emerged as a potential nominee for the Federal Reserve Board of Governors, said she would be in favor of an inflation target of 0%.

"My ideal would be zero," she said of her preferred inflation target in an interview with Markets Insider. "Stable prices mean stable."

Congress has set specific objectives for the Fed, including stable prices and maximum employment. The Fed currently targets 2% inflation, a level officials see as optimal for the economy.

"What would you really want to do is, the level of money and credit in an economy is calibrated to stable consistent price signals that are conveyed through time," she added. "That would be the ideal."

That would be a departure from current policy of setting a positive inflation target, which economists say is optimal in part because price changes are difficult to measure precisely.

"'Price stability' is vague, and has been interpreted as 2% partly because of the view that there remains a bias in price indices because of difficulty in incorporating quality improvements," said Menzie Chinn, an economist at the University of Wisconsin at Madison.

A 0% inflation target would leave the central bank with fewer tools in the event of a downturn and could eventually lead prices lower, according to Josh Wright, a former Fed staffer who is now the chief economist at iCIMS, a recruiting software company.

"Since inflation always has some volatility, a zero percent inflation target would likely mean that we would see deflation a significant amount of the time," he said. "Deflation disadvantages borrowers, so households that need to borrow to pay for college or housing would be hurt."

The New York Times and Bloomberg reported in May that Shelton is being vetted for a seat on the Fed, and she told Markets Insider she has been contacted by the Office of Presidential Personnel.

Read the full interview with Shelton here.