El-Erian Proposes 2.5-3% Inflation Target Range Amid Fed Framework Debate

Economist Mohamed El-Erian argues the Federal Reserve should shift from its 2% point inflation target to a 2.5-3% range [0,1]. This proposal stems from concerns that point estimates lack precision in today’s structurally changed economy, marked by more frequent supply shocks (e.g., pandemic disruptions, trade tensions) [1,3]. El-Erian notes current 3% inflation has not unanchored long-term expectations, supporting his case for a higher range [1]. Notably, two Fed officials have echoed the range target idea, indicating growing internal support for framework reform [1]. El-Erian’s credibility—including roles as Vice Chair of the Carnegie Endowment and advisor to Allianz—adds weight to the proposal [2].

1. Policy Flexibility
   : A range target would allow the Fed to maintain lower interest rates if inflation stays within bounds, reducing pressure on borrowers [1].
2. Market Stability
   : Replacing the 2% point target could mitigate overreactions to small inflation deviations, lowering volatility [1].
3. Structural Alignment
   : The proposal reflects a need to update the 2012-era target to fit modern economic realities (supply chain shifts, AI impacts) [3].
4. Fed Divisions
   : The debate comes amid deep internal Fed divisions over strategic direction, making reform timing uncertain [3].

• Risks
  : Delayed framework reform may lead to policy misalignment with economic conditions, potentially increasing market volatility [3]. Unclear stakeholder consensus could slow adoption of the range target [0].
• Opportunities
  : Adopting a range could enhance monetary policy effectiveness and reduce unnecessary rate hikes, supporting economic growth [1]. It may also improve market predictability by setting clearer bounds for acceptable inflation [1].

• Proposal
  : 2.5-3% inflation target range (vs. Fed’s current 2% point target) [1].
• Advocate
  : Mohamed El-Erian (Vice Chair, Carnegie Endowment; Allianz advisor) [2].
• Context
  : U.S. inflation has stabilized at ~3% without unanchoring expectations [1].
• Debate
  : Two Fed officials have publicly supported a range target, indicating ongoing framework discussions [1].