Jerome Powell announced the Federal Reserve would not hinder periods of inflation above its 2% target in an effort to average out long-term inflation. (Kansas City Fed/YouTube)
Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.
The Federal Reserve a change to its inflation targeting regime. Instead of shooting to hit 2% every year, it will aim to achieve 2% “on average” over an unspecified period of time. So, if inflation runs below target in 2020 and 2021 because of a pandemic-induced recession, the Fed might allow inflation to rise above 2% and stay there during 2022 and 2023, thus achieving an average of 2% from 2020 to 2024. The idea is that by allowing inflation to run “moderately” higher, the Fed could maintain low interest rates and quantitative easing [QE] long enough to achieve full employment, rather than starting to withdraw it before full employment is reached.
There’s only one problem with this. There’s absolutely no reason whatsoever to think that temporarily raising the Fed’s inflation target would raise inflation.
Ever since the financial crisis of 2008, the Fed has struggled to meet its inflation target. As this chart shows, the Fed’s preferred measure of inflation, core personal consumption expenditures (PCE), has rarely come close to 2%, let alone exceeded it:
This is despite interest rates at historic lows and, latterly, an extremely strong labor market. In , the Chairman of the Federal Reserve, Jay Powell, commented that the inverse relationship between inflation and unemployment, upon which Fed interest rate policy has traditionally relied, appears to be broken:
Basically, until the pandemic hit, everyone was working but they weren’t getting pay rises. So there was no sustained upwards pressure on consumer prices from wage demands.
There wasn’t any sustained inflationary pressure from money creation, either. The failure of QE to return inflation to the Fed’s target is one of the big mysteries of the last decade. All that new money should have set off an inflationary spiral – but it didn’t. Well, not in consumer prices, anyway, though it has inflated asset prices, and continues to do so.
To be sure, the Fed is far from the only central bank struggling to get inflation off the floor. The ECB has failed to meet its 2% target for the whole of the last decade. And the Bank of Japan has never managed to raise inflation above zero for any length of time, despite negative interest rates, massive QE programs, and the biggest government debt pile in the world.