FED Chairman Jerome Powell at his virtual Jackson Hole symposium speech last week finally made it official that the FED’s infamous 2% inflation target is now no longer a hard number but an average. Meaning that each year is looked at in relation to the years that preceded it. Prior to this mandate the FED claimed that their target each year is 2%. Now, the target is that over the space of time the inflation will average 2%.
The measures that the FED use to calculate inflation shows that over the last several years there has been inflation below 2%. In order for the inflation level to average 2% we will need several years of inflation above 2%. What the FED has really done is increase their inflation target rate. But by how much is what we don’t know.
They are basically saying that because prices didn’t rise enough in the past, we are going to aim for prices to increase more in the future to level out the low inflation. What I don’t quite understand is why there is a need to level out inflation and why the FED wants to increase the cost of living.
Initially it was the FED’s job to keep prices stable. Price stability meant prices not changing and they did this by trying to keep inflation as close to 0% as possible with 2% being set as a ceiling rather than a target. If inflation was below 2% it wouldn’t be viewed as problematic but viewed as price stability. The closer to 0 the better they did their jobs.
Eventually, rather than being a ceiling - 2% became a target. The FED said that they had to hit 2% because according to the them, if consumer prices went down it would be disastrous for the economy (which is BS). So, this 2% would act as a cushion for them in case consumer prices went down.
Now the FED are saying they want an average rate of 2% meaning they want to increase the standard of living because it didn’t rise enough in the past. For me, this is an absurd monetary policy. For example; in the last few years there was only 1% inflation, so we need more inflation now because it wasn’t at the 2% level.
The bottom line is the FED is in a huge predicament that they have created themselves through all of their previous monetary policy and they cannot defeat inflation. They are saying they are going to let inflation run hotter because they have no choice! It’s not because it’s good for the economy, it’s only necessary to keep the bubble from deflating and to keep the stock market and the property market propped up.
In the event of inflation heating up too much how will the FED put out the fire? What’s next when the yearly inflation is well above 3,4 or 5%? At some point these numbers will become a joke and well above their averages. The FED printing money and also allowing money to lose value will destroy peoples saving and is terrible for the real economy. It will create a larger wealth gap as the standard of living increases while the assets of the rich increase.
Elon Musk is now worth over 100 billion dollars. Jeff Bezos is now worth over 200 billion dollars. These are the super-rich but if you look at the bottom end of the spectrum, people who don’t have any money in stock markets or own their own homes. Inflation will put pressure on these people the most if rents and other consumer items are to increase. The very people all of this monetary policy is supposedly aimed at helping the most will in fact end up hurting the most.