The Fed Now Wants Even More Inflation. The Old “2 Percent Target” Wasn’t Enough.

The Fed Now Wants Even More Inflation. The Old “2 Percent Target” Wasn’t Enough by  for Mises

The US Federal Reserve has adjusted its official inflation target to be even more flexible and inflationary. The Fed has always been more inflationary than the Bundesbank and its successor, the European Central Bank, at least on paper. The primary objective of the ECB is price stability, following the Bundesbank legacy. Curiously, the ECB considers price stability to be given if price inflation is below, but close to, 2 percent. Only when this goal is achieved does the ECB aim to support other economic policies, such as full employment.

In the USA, the preferences look somewhat different. The Federal Reserve pursues three equally important goals. In addition to price stability, the Fed also wants to ensure moderate long-term interest rates and maximum employment. Therefore, a little more inflation to increase employment in the short term is easier to justify with the Fed’s mandate than with that of the ECB. Moreover, the Fed has explicitly set its price inflation target at 2 percent since 2012, which means that it is inherently more inflationary than the ECB with its target rate of under, but close to, 2 percent.

With its recent change in strategy the Fed is going one step further. It now wants to accept and target price inflation rates of over 2 percent if the previous measured rate was below 2 percent. It is now aiming at an “average inflation target.” If, for example, the measured inflation rate is 1 percent for three years, then the Fed has no problem with an inflation rate of 5 percent, to make up the “shortfall.”

Since the US price inflation rate has mostly been below 2 percent in recent years, the Federal Reserve is opening the door to higher monetary inflation. The policy change has further increased the discretionary power in interpreting the Fed’s price stability target. Considering that price stability literally means and is 0 percent price inflation, we have gone a long way down an Orwellian road.

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