As you know we have been saying for a while that if the FED wants to crash the economic car into the ditch, it can…and likely will.
But it doesn’t have to be that way, just because it can.
I’ve been questioning the 2% inflation target the FED has been using. Here’s the origin of it.
Note the date of this article. January 2012. Here are some excerpts from that article, and if you want to read the whole article, click here.
This clip is great!
Keep in mind where inflation was at the time.
The economy was trying to recover from a housing and financial crisis during that time. Remember when your house value went down 20%+?
So, the FED decided they would explicitly set out the 2% inflation target. After all, communicating such will foster the dual mandate from FED – price stability and full employment.
Then throw on top of that in 2020 a pandemic that briefly caused 25% unemployment and the shortest recession in history (shortest, but also completely manufactured). Then because you close businesses and make people stay at home, the government throws billions of dollars into the system to make up for reduced earnings, both business and personal. We’ve gone over this many times, I won’t bother with it this week.
What is interesting is that we are still anchored to this 2% inflation target. Except now our inflation rates look like this.
We’ve argued why do we need to shoot for 2% on the downside, just because we aimed for that on the upside? Through all the ups and downs, since 1929 the average inflation rate has been…wait for it.
That incorporates high inflation years like the 70s and negative inflation (deflation) in the post Great Depression years.
Why isn’t that a number worth shooting for? I’ll tell you, but first here is the first headline floating around.
And that was the reason for a tweet from Mohamed El-Erian, chief economic advisor at Allianz and an overall, really smart guy!
So why bother crushing the economy just to get to an artificial inflation target? In fact, my new favorite US Representative from the state of California had that exact same thought.
That’s a great point. Where have I heard that before? Hmm. Anyway, here is a reply to that tweet by Brad Gerstner, CEO of Altimeter Capital, a $18B hedge fund in Menlo Park.
Yeah Brad, we wouldn’t want to “risk” their credibility! Oh wait, they have credibility? This is the same organization that said inflation was “transitory”?
And last but certainly not least, the past FED President, Janet Yellen (now Treasury Secretary) said the following regarding adjusting the inflation target.
Really, Janet? So when would a good time be to debate this? After you crash the car into the ditch? I would say now is exactly the time to debate both the genesis of the 2% target and whether that is still appropriate for today’s economic environment. I’m with Mr. Khanna and Mr. El-Erian on this one. Too much snark? Maybe, but this stuff is important. Livelihoods and retirement plans depend on policy makers getting this right.
I hope you have a great rest of the week as we head toward 4th of July holiday and the upcoming All-Star Game at T-Mobile Park. Please let us know if you have any questions.