If you thought the last nine years of manipulation, misallocation, and mispricing that was aided and abetted by misguided monetary policy was a problem, you ain’t seen nothing yet. As the FT reports, the Fed and other global central banks are re-evaluating their 2% inflation targets with an eye toward raising them.
Why are Yellen & Co., thinking about raising their inflation targets? The theory is that if central banks can lower inflation adjusted interest rates more than they have in the past, they will be able to provide stimulus to the economy during the next recession.
Sounds good in theory and it probably works in the Fed’s models, but is anybody paying attention here? Do Yellen & Co. really believe a slightly lower interest rate is going to achieve faster growth or higher inflation?
We’ve had nine years of the most aggressive monetary policy the world has ever seen and all we have to show for it is bubble conditions in financial markets. Measured inflation is still below the Fed’s target and growth has been disappointing for the entirety of the expansion.
This is a half-baked idea that should never be allowed to see the light of day.
Janet Yellen, the Federal Reserve chair, has given new impetus to a simmering debate in central banking as she declared the question of whether inflation targets should be raised to be one of the most critical facing monetary policymakers anywhere in the world.
Her concern is that in a world which requires low interest rates even when economies are healthily running at full employment, there is not much scope to cut rates in times of difficulty and the likelihood is that rates get stuck at the lower bound of zero for long periods.
Read more here.
Jeremy Jones, CFA
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