If the Fed Can’t Hit It’s Inflation Target, Why Not Just Move the Goalposts?


by Peter Schiff, Schiff Gold:

The Fed has an inflation problem.

The CPI is running well above the mythical 2% target and there isn’t any sign that it will ease soon. To deal with this problem, the central bank should tighten its monetary policy. But that would create a whole new problem, given that it can’t tighten in this economic environment. So, what is a central banker to do?

Well, if the Fed can’t hit the target, how about just moving the target?

That idea is apparently seriously being considered.

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In a Wall Street Journal article, Greg Ip floated the idea.

One strategy [Powell]—or his successor—should consider in that eventuality is to simply raise the target.”

Ip buys into Keynesian economic voodoo and thinks straitjacketing the Fed with a 2% inflation target will hinder job creation.

Why would higher inflation ever be a good thing? Economic theory says modestly higher, stable inflation should mean fewer and less severe recessions, and less need for exotic tools such as central-bank bond buying, which may inflate asset bubbles. More practically, if inflation ends up closer to 3% than 2% next year, raising the target would relieve the Fed of jacking up interest rates to get inflation down, destroying jobs in the process.”

In a sense, the Fed has already raised the inflation target. Not so long ago, it was a hard 2% target. But the COVID-19 pandemic gave the Fed just the excuse it needed to move the inflation goalposts.

Jerome Powell announced the shift to “average inflation targeting” during his Jackson Hole speech in August 2020. In effect, the Fed will allow the CPI to run “moderately” over 2% “for some time” to balance out periods where it runs under that level.

“Many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy,” Powell said during prepared remarks at the summit.

Of course, when you define inflation correctly – as an expansion of the money supply – it is anything but “too low.” In fact, it is at the highest level in history.  But based on the CPI number, inflation ran well below 2% for many years. That means that the Fed can now hold interest rates at zero for a significant amount of time even with CPI running above 2%.

In a nutshell, the Fed effectively raised its inflation target, but we don’t actually know what that target is.

Nevertheless, 2% still looms in the background. Today, it’s hard to argue inflation is “moderately” above 2%. That’s why we’re seeing this push for a higher target. Perhaps the Fed can make do without fighting inflation if we just say the target is going to “average” around 3%.

Or heck, why not 4%?

Mises Institute senior editor Ryan McMaken summed it up this way.

Rather than feel the pressure to taper just because price inflation has risen above the 2% target, Ip wants to make sure the Fed can just keep on with the stimulus until price inflation exceeds 3%, or maybe even 4%. And who knows? After that, maybe “economic theory” will tell us that 5% inflation is an even better target. Certainly, that would be no less arbitrary a number than 4% or 2%.”

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