For some reason, the Federal Reserve’s goal over the last many years has been to “achieve” 2% inflation. When they talk about inflation, they are obviously not talking about the supply of money, which has greatly exceeded 2%. They are talking about price inflation.
I don’t think the Fed needs to target 2% inflation at all. Why not zero percent inflation? Or since we’re going down that road, why do we need a central bank at all?
But for this piece, let’s just go with the 2% price inflation target. It is quite obvious that the Fed has shot way past that target, with current CPI numbers coming in above 8% annual for several months now.
But let’s remember back in early 2021, the Fed changed its goal. In the FOMC monetary policy statement of January 27, 2021, it states:
“With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent.”
Aside from seeing just how wrong the Fed was in worrying about inflation being too low, it is interesting that we now don’t hear much about this relatively recent goal of achieving an average of 2 percent over time.
Jerome Powell never really said what he meant by “over time”. Was this supposed to be a 2 percent average over the course of a year, over 5 years, or what?
Now that price inflation has exceeded 8% on an annual basis for several months, what will the Fed have to do to average 2% “over time”?
I mean, correct me if I’m wrong, but I believe this means we have to go way below 2 percent at some point to get an average of 2 percent. Is this still the policy of the Fed? Have they quietly dropped this goal that started a mere 20 months ago?
If the Fed wants an average of 2 percent, then the Fed should really be pushing for price deflation at this point. We need to see falling prices. If there is a 2 percent average target for the last 2 years, then we need some serious price deflation, which I have never known of a central bank anywhere to advocate.
Just like the government does with COVID, wars, Russia hoaxes, and everything else, the central bank just drops this one down the memory hole. “Let’s just not mention it anymore and hope that nobody notices. Our friends in the media surely won’t say anything about it.”
This just shows that they make their policies however they want to make them. If they want to inflate more to cover the massive spending from Congress, then they’ll do it. If they want to bail out banks, then they’ll do it. If they want to blow up some financial bubbles, they’ll do it. They can always find the justification somewhere.
Now that there is high price inflation, the Fed is spooked that they will lose control of the dollar. So now they are tightening. They aren’t going to advocate for outright consumer price deflation because that isn’t what central banks do. So Fed officials can just ignore what they previously said and find other justifications.
This is how the game works. Unfortunately, it doesn’t work very well for us.