Why the Fed’s Two-Percent Inflation Target Is Meaningless
Federal Reserve technocrats like to use a variety of slogans and buzzwords designed to make the Federal Reserve look like it’s an apolitical, “scientific” institution guided only by a quest for sound management of the economy. Specifically, nearly every time Fed chairman Jerome Powell makes an appearance—whether it’s the usual FOMC press conference, or when testifying before Congress—Powell is careful to make mention of how the Fed is “data driven,” and how the Fed “seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.”
This sounds nice, of course, and gives the impression that the Fed is concerned about keeping price inflation “low.” In practice, however, limiting price inflation is lowest among the Federal Reserve’s priorities. Rather, the Federal Reserve is primarily concerned with using monetary stimulus to keep the government’s borrowing costs low and employment rates high—which is contrary to the alleged goal of “low” price inflation.
Indeed, in recent years we have repeatedly seen how the Federal Reserve’s much-touted two-percent price-inflation goal is little more than a political slogan.
Two-Percent Inflation “Over the Longer Run”
The Fed’s lack of interest in keeping inflation low is demonstrated in part by how the Fed has repeatedly upped its target inflation rate over the past thirty years.
After all, the two-percent target has only been official Fed policy since 2012. It was the result of an arbitrarily-chosen number adopted to mimic with the policy of the European Central Bank which had adopted a two-percent target for the new euro currency in 1999. Before then, the only official, legislative price-inflation target had been zero percent, as stated in the Full Employment and Balanced Growth Act of 1978.
In the 1990s, some members of the Fed’s Federal Open Market Committee—especially Janet Yellen—began calling for a higher target of two percent. After the launch of the euro, the Fed informally adopted a two-percent target, and formally adopted the policy in 2012. The policy, as stated, implied that the Fed would seek to keep the price-inflation rate as close as possible to two percent at all tim
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