Index Investing News
Sunday, May 25, 2025
No Result
View All Result
  • Login
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion
No Result
View All Result
Index Investing News
No Result
View All Result

2% Inflation Target is Silly

by Index Investing News
July 26, 2023
in Economy
Reading Time: 4 mins read
A A
0
Home Economy
Share on FacebookShare on Twitter


 

One of the more foolish arguments 1 that seem to be emanating from the Fed about their intention to raise rates another quarter point today: The 2% inflation target that has been in place pretty much the entire post-financial crisis era.

There is no empirical evidence showing 2% is the optimal long-run inflation target, given the Fed’s dual mandate of price stability and maximum employment. It is one of those round numbers that people just kinda made up and started with for no apparent reason.

If there was something magical about 2% as the ideal balance between prices and jobs, that would be one thing. But the 2% inflation target is LITERALLY a random number 2 that originated in New Zealand in the 1980s. “Surprisingly, it came not from any academic study,” CFR observes, “but rather from an offhand comment during a television interview.” For reasons no one has intelligently articulated, other countries subsequently adopted it as their target.

Laurence Ball, Professor of Economics at Johns Hopkins and Research Associate at the National Bureau Of Economic Research, made the case in 2013 that 4% was a more rational target. “Raising inflation targets to 4% would have little cost, and it would make it easier for central banks to end future recessions,” he noted.3

The Federal Open Market Committee has justified the 2% inflation based on inflation expectations. The Board of Governors stated, “When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.”

The problem with this approach is as we have repeatedly shown, it is utterly useless. Inflation expectations are typically at their lowest right before a surge in inflation occurs; they are at their highest levels just as inflation rolls over and heads downwards. People’s inflation expectations mimic the typical overenthusiastic investor, piling in at the top of the market and panic selling near the bottom.

Expectations are no way to run monetary policy and are more fit for a Monty Python film.4

Consider: We had 2% inflation expectations the entire post-GFC era. The economy was sluggish, job creation as weak, consumer spending was soft. ZIRP and QE had driven rates to zero (or negative in some parts of the world), and 2% seemed a reasonable albeit arbitrary upside target. But after $6 trillion in fiscal stimulus, mortgage rates at 7.5%, perhaps 3% makes much more sense as a downside inflation target.

I have noted in the past that the Fed was late to get off its emergency footing, late to recognize inflation pierced its 2% target to the upside (March 2021), late to begin raising rates (March 2022), late to recognize inflation had peaked (June 2022), late to recognize that they have already beaten inflation in (July 2023).

I have a pet theory as to why they have been consistently so late: Many economists have misunderstood this entire economic cycle, including inflation. These older school economists – who demanded vigilance against rising prices, declared inflation to be persistent, sticky, and non-transitory or even stagflationary – all made their bones in the 1970s/80s. They are haunted by a very different type of economy that had very different inflation drivers. Their PTSD is palpable.

They are taking the wrong lesson from that era. As Professor Ball wryly observed to the NYT’s Jeff Sommers, “If 4% was good enough for Volcker, it should be good enough for us.”

 

 

Previously:
A Dozen Contrarian Thoughts About Inflation (July 13, 2023)

More Inflation Expectations Silliness (July 5, 2023)

Inflation Expectations Are Useless (May 17, 2023)

For Lower Inflation, Stop Raising Rates (January 18, 2023)

Why Is the Fed Always Late to the Party? (October 7, 2022)

Inflation Expectations: A Dubious Survey (September 21, 2022)

Transitory Is Taking Longer than Expected (February 10, 2022)

 

 

__________
1. Let’s hold aside the claim that the Fed needs to “maintain credibility,” as that squishy argument is simply too ridiculous to address.

2. The case for 4% inflation, Laurence Ball, VoxEU/CEPR 24 May 2013

3. Like 20% for a bull or bear market, its made up, without any data supporting it as either an indicator or a predictor.

4. Peasants: We have found a witch! (A witch! a witch!)
Burn her burn her!
Peasant 1: We have found a witch, may we burn her?
(cheers)
Vladimir: How do you known she is a witch?
P2: She looks like one!
V: Bring her forward
(advance)
Woman: I’m not a witch! I’m not a witch!
V: ehh… but you are dressed like one.
W: They dressed me up like this!
All: naah no we didn’t… no.
W: And this isn’t my nose, it’s a false one.
(V lifts up carrot)
V: Well?
P1: Well we did do the nose
V: The nose?
P1: …And the hat, but she is a witch!
(all: yeah, burn her burn her!)
V: Did you dress her up like this?
P1: No! (no no… no) Yes. (yes yeah) a bit (a bit bit a bit) But she has got a wart!
(P3 points at wart)
V: What makes you think she is a witch?
P2: Well, she turned me into a newt!
V: A newt?!
(P2 pause & look around)
P2: I got better.

 

Print Friendly, PDF & Email



Source link

Tags: inflationsillytarget
ShareTweetShareShare
Previous Post

18th Century New Jersey Farmhouse Holds A Place In Baseball History

Next Post

US President Biden’s son Hunter’s plea deal over tax charges falls apart

Related Posts

SoftBank’s Masayoshi Son floats thought of US-Japan sovereign wealth fund

SoftBank’s Masayoshi Son floats thought of US-Japan sovereign wealth fund

by Index Investing News
May 25, 2025
0

Unlock the White Home Watch e-newsletter without costYour information to what Trump’s second time period means for Washington, enterprise and...

Donald Trump makes dangerous guess by rekindling his commerce conflict with the EU

Donald Trump makes dangerous guess by rekindling his commerce conflict with the EU

by Index Investing News
May 24, 2025
0

Donald Trump likes to make offers. And he could also be calculating that his sudden escalation of tariffs on the...

The Fed’s not making a revenue

The Fed’s not making a revenue

by Index Investing News
May 24, 2025
0

Unlock the Editor’s Digest free of chargeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.The...

Trump’s subsequent 100 days

Trump’s subsequent 100 days

by Index Investing News
May 24, 2025
0

This week, Swamp Notes goes to London for a dwell recording. Katie Martin, host of the Unhedged podcast, and Chris...

Greenback notches greatest weekly drop since tariffs sell-off over US debt fears

Greenback notches greatest weekly drop since tariffs sell-off over US debt fears

by Index Investing News
May 24, 2025
0

Unlock the Editor’s Digest totally freeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.Investor jitters...

Next Post
US President Biden’s son Hunter’s plea deal over tax charges falls apart

US President Biden's son Hunter's plea deal over tax charges falls apart

Binance Drops License Application in Germany

Binance Drops License Application in Germany

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

RECOMMENDED

Kamala Harris Pledges US Dominance in Blockchain & AI Know-how

Kamala Harris Pledges US Dominance in Blockchain & AI Know-how

September 26, 2024
What is China’s Volt Typhoon? And How Can It Be Stopped?

What is China’s Volt Typhoon? And How Can It Be Stopped?

July 8, 2023
Tristan Thompson’s Brother DENIES Accusing Khloé Kardashian Of Using Mom’s Death As A ‘Storyline’!

Tristan Thompson’s Brother DENIES Accusing Khloé Kardashian Of Using Mom’s Death As A ‘Storyline’!

July 30, 2023
Bitcoin Touches Document-Excessive K, Provides Nearly K in a Week

Bitcoin Touches Document-Excessive $85K, Provides Nearly $20K in a Week

November 11, 2024
They Caught the Fish, but the .5 Million Prize Got Away

They Caught the Fish, but the $3.5 Million Prize Got Away

July 10, 2023
Mark Cuban Shades Donald Trump’s Marketing campaign Amid Elon Musk’s Involvement

Mark Cuban Shades Donald Trump’s Marketing campaign Amid Elon Musk’s Involvement

October 21, 2024
Victoria’s Secret & Co. 2024 This fall – Outcomes – Earnings Name Presentation (NYSE:VSCO)

Victoria’s Secret & Co. 2024 This fall – Outcomes – Earnings Name Presentation (NYSE:VSCO)

March 6, 2025
AXP Earnings: All you need to know about American Express’ Q4 2022 earnings results

AXP Earnings: All you need to know about American Express’ Q4 2022 earnings results

January 27, 2023
Index Investing News

Get the latest news and follow the coverage of Investing, World News, Stocks, Market Analysis, Business & Financial News, and more from the top trusted sources.

  • 1717575246.7
  • Browse the latest news about investing and more
  • Contact us
  • Cookie Privacy Policy
  • Disclaimer
  • DMCA
  • Privacy Policy
  • Terms and Conditions
  • xtw18387b488

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • World
  • Investing
  • Financial
  • Economy
  • Markets
  • Stocks
  • Crypto
  • Property
  • Sport
  • Entertainment
  • Opinion

Copyright © 2022 - Index Investing News.
Index Investing News is not responsible for the content of external sites.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In