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FED’s 2% Inflation Target Reset to 2.5% or More for Next Ten Years
The Federal Reserve has coalesced around an idea that 2% inflation is the "correct" amount of inflation. The target is seemingly a permanent, long-term target. The Fed's favorite measure of inflation, the PCE deflator, has averaged 1.5% over the past decade. But the Fed now says it could let inflation in the future run high so that the long-run average rises to 2%. This statement is vague but one interpretation is that the Fed is willing to have inflation run at 2.5% for the next ten years so that the 20-year average is 2%.
Over the last 10-years, low inflation resulted in unemployment falling to 3.5% in February, the lowest since the 1960s although COVID-19 was an external shock to the economic system that is independent of monetary policy.
But what does the commitment to 2% long-run inflation mean, or why it is appropriate. Inflation averaged 1.5% over the past ten years with no serious consequences to the economy. By allowing inflation to average 2.5% over the next ten years what effect might it have?
Since the Fed is saying they really don't have a 2% inflation target, they have a target above 2% for the foreseeable future because the money supply has exploded as the Fed has monetized federal debt and the Fed said the PCE Deflator would be 0.8%, but it is already 1.4%, and looks more likely to rise than fall.
Back in the 1970s, the Fed kept saying inflation was rising, but it was all because of temporary factors (like oil) and it would fall later. But, once inflation is out of the bottle, it doesn't come down until the Fed tightens, like Paul Volcker did in the late 1970s and early 1980s. And if it rises to 2.5%, the Fed will say that is OK, because the average over some period of time (which it can make up by using any number of years of history) is still 2%.
The Fed ‘s 2% artificial target is just an excuse for causing more inflation. If 2% is really the target, the Fed should claim victory when it is less than that and fight to keep it from rising above. Unfortunately, the Fed is making arguments about inflation that could result in such high inflation that it could result in a devaluation of the US dollar, causing the US economy to falter.
The Federal Reserve has coalesced around an idea that 2% inflation is the "correct" amount of inflation. The target is seemingly a permanent, long-term target. The Fed's favorite measure of inflation, the PCE deflator, has averaged 1.5% over the past decade. But the Fed now says it could let inflation in the future run high so that the long-run average rises to 2%. This statement is vague but one interpretation is that the Fed is willing to have inflation run at 2.5% for the next ten years so that the 20-year average is 2%.
Over the last 10-years, low inflation resulted in unemployment falling to 3.5% in February, the lowest since the 1960s although COVID-19 was an external shock to the economic system that is independent of monetary policy.
But what does the commitment to 2% long-run inflation mean, or why it is appropriate. Inflation averaged 1.5% over the past ten years with no serious consequences to the economy. By allowing inflation to average 2.5% over the next ten years what effect might it have?
Since the Fed is saying they really don't have a 2% inflation target, they have a target above 2% for the foreseeable future because the money supply has exploded as the Fed has monetized federal debt and the Fed said the PCE Deflator would be 0.8%, but it is already 1.4%, and looks more likely to rise than fall.
Back in the 1970s, the Fed kept saying inflation was rising, but it was all because of temporary factors (like oil) and it would fall later. But, once inflation is out of the bottle, it doesn't come down until the Fed tightens, like Paul Volcker did in the late 1970s and early 1980s. And if it rises to 2.5%, the Fed will say that is OK, because the average over some period of time (which it can make up by using any number of years of history) is still 2%.
The Fed ‘s 2% artificial target is just an excuse for causing more inflation. If 2% is really the target, the Fed should claim victory when it is less than that and fight to keep it from rising above. Unfortunately, the Fed is making arguments about inflation that could result in such high inflation that it could result in a devaluation of the US dollar, causing the US economy to falter.
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