The Fed's Inflation Obsession
If one needs convincing the Fed and mainstream economists are divorced from reality, read detailed economic explanations from those so called “experts.” A few sentences in reveals no economic theory employed, as exemplified by Fed head, Jerome Powell, addressing the world on the Fed’s new inflation objectives as part of the updated monetary policy strategy at the August 27 Jackson Hole symposium.
The persistent undershoot of inflation from our 2 percent longer-run objective is a cause for concern.
This notion of a “2% inflation” target may seem as though it has been in effect forever, but it was only officially made a goal by the Fed in 2012. Unofficially, it began in countries around the world in the late 80’s to early 90’s. Contrary to what we’ve been conditioned to believe, economic policy was not always this way. An article on the origins of the inflation target was shared this week, where it was noted by the New York Times how the 2% goal was literally “plucked out of the air” with no empirical evidence ever presented to support the target.
After suggesting inflation below 2% would be cause for concern, Powell follows up with:
Many find it counterintuitive that the Fed would want to push up inflation. After all, low and stable inflation is essential for a well-functioning economy. And we are certainly mindful that higher prices for essential items, such as food, gasoline, and shelter, add to the burdens faced by many families, especially those struggling with lost jobs and incomes.
Here's the tricky part; for the last decade, we’ve been told by the Fed, the media, and popular economists consumer price inflation has been low. While technically true that it has been low according to their measurement, the problem lies in the measurement itself. It’s not a matter of getting the “correct” inflation number; it’s that no such number exists. These calculations rely on so called experts to arbitrarily choose a basket of goods and assign a relative weight of importance to each item. Yes, it amounts to data, but no, it’s not credible since it cannot factor in the countless reasons which cause price fluctuations, nor can it calculate the sheer number of inputs required to arrive at a figure that can be adequately applied to an entire nation. Anecdotally for the average American, who is not a central banker, the cost of goods and services has increased at a rate much greater than 2% per annum for a very long time.
Unfortunately, even though Powell acknowledges the burden inflation places on families, he dismisses the gravity by saying:
Inflation that is persistently too low can pose serious risks to the economy. Inflation that runs below its desired level can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.
Fortunately, the train of thought is revealed: if low “inflation expectations” materialize into pulling “actual inflation” lower, higher inflation expectations should push actual inflation higher. In this regard, we see the Fed rely on unproven theories more than anything else. Consider, if inflation expectations influenced actual inflation, why does the Fed continually struggle with “the persistent undershoot” of inflation? Despite never providing empirical evidence to support inflation expectations, it remains paramount to the Fed, especially since:
Expected inflation feeds directly into the general level of interest rates….
By taking a little time reading a speech from a central banker, it becomes apparent something just doesn’t add up. For an organization which claimed “monetary policy is data dependent,” they have failed to justify the 2% inflation target or proven that inflation expectations actually work. One would be hard pressed to see any data to support their assertions, which is probably why it’s best they maintain an air of mystique around them ignoring Austrian economics entirely.