March 8, 2010 / 8:24 AM / 10 years ago

Volcker: higher inflation target idea "nonsense"

Chairman of the President's Economic Recovery Advisory Board Paul Volcker testifies before the Senate Banking, Housing, and Urban Affairs Committee on Capitol Hill, February 2, 2010. REUTERS/Jim Young

BERLIN (Reuters) - The idea, floated by IMF economists, that central banks could raise their inflation targets is nonsense, White House economic adviser Paul Volcker said in a German newspaper interview published on Monday.

A research paper by International Monetary Fund staff last month raised the idea that policymakers might consider raising the 2 percent inflation target chosen by many central banks to 4 percent.

“That is simply nonsense,” Volcker told the Frankfurter Allgemeine Zeitung.

Asked whether the euro was under threat from speculation against Greece and other countries, Volcker said: “It is a challenge but the euro countries will be ready for it.”

Turning to the U.S. financial sector, Volcker said U.S. banks were not yet healthy. “The repair work is still running. It has just begun.”

Known for vanquishing stagflation during the Carter and Reagan administrations, the 6-foot-7-inch Volcker commands deep bipartisan respect.

In January, President Barack Obama stunned markets with a three-part proposal to limit banks’ proprietary trading, get them out of the hedge fund and private equity business, and limit their future growth through a new market share cap.

The proposals became known as “the Volcker rule” and Congress is still figuring out what to do about it.

Asked if Europe should copy his proposals, Volcker said: “I wouldn’t say copy. We should reach a joint agreement on what the appropriate solutions are.”

Writing by Paul Carrel; editing by Patrick Graham

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