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Posts Tagged ‘inflation target’

Doug Casey on the Fed Raising Its Inflation Target and Other Shenanigans

Posted by M. C. on February 16, 2023

By contrast, in an inflationary environment, whether it’s 10-15% (the real number in the US right now), or 100% per year as in countries like Venezuela and Zimbabwe, or the 2% the Fed advocates, currency debasement discourages people from saving. And if you don’t save, you can’t build capital. And if you don’t build capital, you can’t make investments and you can’t improve the standard of living.

https://internationalman.com/articles/doug-casey-on-the-fed-raising-its-inflation-target-and-other-shenanigans/

by Doug Casey

International Man: Recently, there have been whispers about the Fed raising its official inflation target above 2%.

But before we get into that, we should define our terms.

What is the proper way to think of inflation and the Fed itself?

Doug Casey: First of all, the word “inflation” should be viewed as a verb, not as a noun. Inflation is an increase in the amount of money. This is why Bitcoin—which may have other issues as a money—is inflation-proof; it’s a mathematical certainty that no more than 21 million will ever exist. There are absolutely no limits to the supply of fiat dollars, however.

Inflation is one of the most misused words; few even think about the word’s actual meaning. What is inflation? “Well, that’s prices going up.” No, it’s not. To say that is to confuse cause and effect. Inflation is an increase in the money supply. “Inflation”, a rise is the general price level, results when the money supply is increased by more than real wealth increases.

Do you think I’m just making an obvious, common-sense point? Au contraire. For instance, the Wall Street Journal of Feb 13 featured an article entitled “Inflation Is Falling, and Where It Lands Depends on These Three Things.” In the opinion of the clueless reporter, the three things are “goods, shelter, and other services.” Nowhere does she reference the money supply as the cause of inflation. It’s what she was taught in school, and she stupidly perpetuates the notion.

Prices go up as a result of money printing. But most people believe inflation comes from out of nowhere, like a freak storm. They appear to think it has no specific cause—unless it’s blamed on the butcher, the baker, or an evil oil company. It never occurs to them that central banks—the Fed in the US—are directly responsible for creating money, causing prices to rise. In fact, in a perversion of reality, the public seems to believe The Fed “fights” inflation, because that’s what the Fed says. This is the opposite of the truth.

The Fed inflates the currency by buying the debt of the US government. When the Fed buys US government debt, it credits the US government’s bank accounts at commercial banks with Federal Reserve notes. The government can then write checks to pay for what it wishes.

At this point, however, the US government is approaching terminal bankruptcy with a federal debt of $31.5 trillion and $181 trillion of unfunded liabilities.

Most US government spending in the future won’t be funded through taxes or borrowing from the commercial markets. And certainly not by selling debt to foreign governments, who recognize it’s the unsecured liability of a bankrupt entity. They’re trying to get rid of it. How, therefore, will the federal government fund its spending from here on? Mostly by selling their debt to the Federal Reserve.

It’s actually worse than that, because we have a fractional reserve banking system where not only is there no distinction between savings accounts and checking accounts, but banks can loan out the same dollar numerous times, which compounds the problem.

I’m sorry to give short attention to many concepts here. That’s why books are written…

International Man: What do you make of the Fed’s arbitrary target of a 2% rise in the general price level? Why not 3% or higher?

Doug Casey: The Federal Reserve has been trying to create a little bit of inflation because, they say, “A little bit of inflation is good.” No, it’s not. Even a little bit of inflation is deadly poisonous. For two reasons: It creates the business cycle. And it destroys the value of savings—and saving is the basis of capital creation. People who say that a little inflation is a good thing are dangerous fools.

We should also remember that the US government’s official inflation numbers are very questionable. In my view, they’re only marginally more reliable than their equivalent in Argentina—a country whose numbers are completely political and laughably inaccurate.

They’ve come up with 2% as the correct amount to debase the currency every year. An oblivious and poorly educated public has been propagandized into believing that makes sense.

It doesn’t. The amount and value of money should be determined by the market, not by a bureaucracy.

See the rest here

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Too Much Inflation? Just Raise the Inflation Target! | Mises Wire

Posted by M. C. on September 24, 2021

But it’s a safe bet that if the accepted inflation target were increased to 4 percent, we’d be hearing little to nothing right now about tapering, normalization, or any other effort to cut price inflation. The Fed would then be more free to keep the easy money spigot open longer without having to hear complaints that the Fed has “lost control” of price inflation. That would be great for stock prices and real estate prices. Ordinary people, on the other hand, might fare less well. 

https://mises.org/wire/too-much-inflation-just-raise-inflation-target

Ryan McMaken

In late August, Fed chairman Jerome Powell suggested that the Federal Reserve would begin tapering before the end of the year, an admission that price inflation was rising above the 2 percent target. Nonetheless, the Fed took no immediate action in the following month. This week, Powell again suggested a taper would begin soon, stating it would begin soon enough that the process could “conclud[e] around the middle of next year,” and maybe could begin in November. This, of course, was highly conditional, with Powell noting this taper would only happen if “the economic recovery remains on track.”

Some interpreted this as a hawkish turn for Powell, but again, we should expect no immediate action on this. Lackluster economic growth remains a concern and Powell’s qualifier on the “recovery” remaining on track will be key. Last week, Goldman downgraded the US economic growth forecast, and the Beige Book—which always casts economic growth in a rosy glow—also reduced its description of the economy during July and August to “moderate.” Meanwhile, the Bank of England today signaled a worsening global situation with its own downgrade of growth expectations. In other words, if the economy isn’t improving enough—according to the Fed—then it can simply abandon plans to taper.

The Fed may be talking taper, but fears of low growth among doves will fuel ongoing calls for continued stimulus. In fact, we’re already seeing some calls for abandoning the 2 percent inflation target in favor of even higher targets. This, it is believed, will allow for longer and more aggressive periods of stimulus. 

A Weak Recovery

The root of this drive for more inflation lies partly in the fact that many inflation doves believe that the Fed was too timid with stimulus after the Great Recession. Indeed, growth was remarkably slow in those days, producing “the slowest economic expansion” in many decades.1 This was in spite immense amounts of monetary stimulus. Nonetheless, the Fed repeatedly spoke of an “improving economy,” and repeatedly hinted at tapering. But it was only in 2016 that the Fed finally dared to allow the target interest rate to inch upward. This was largely done out of fear the Fed would have no room to maneuver in case of another crisis. Price inflation, after all, remained low in the official measures.

But in 2017 and 2018, when CPI inflation began to push above 2 percent, the expectation arose that the Fed would begin to meaningfully taper to keep inflation near the stated 2 percent target. This alarmed some inflation doves who were concerned—with good reason—that any reining in of the Fed’s easy money policies would end the very fragile and lackluster recovery then underway. They wanted to keep the asset-price inflation going—to reap the benefits of the so-called “wealth effect.” These fears were partially borne out when, in spite of the timidity of the Fed’s tapering efforts after 2018, the repo crisis of 2019 suggested trouble was indeed brewing. And it’s not surprising. Economic “growth” rested largely on a mountain of zombie companies and a financialized economy addicted to artificially cheap credit. 

How that would have played out in the absence of the covid panic is unknown. In any case, efforts at reining in monetary inflation evaporated with the covid crisis and the target interest rate was quickly returned to 0.25 percent. Additional asset purchases resumed at breakneck speed, with the Fed’s portfolio soon topping $8 trillion.

Pushing Inflation Targets Upward

The covid crisis gave doves an opportunity to press for a more “flexible” inflation target. In August of 2020—with central bankers looking for new ways to justify continued stimulus—the Fed adopted a new policy in which it would pursue an average 2 percent inflation goal. In other words, the Fed could now pursue a price inflation goal above 2 percent for some periods so long as it all averaged out to 2 percent over time.

But even that hasn’t been enough for the advocates of ever more price inflation. We’re now seeing calls for ending the 2 percent target altogether—and raising it.

For example, writing at the Wall Street Journal earlier this month, Greg Ip noted that Powell appears to be banking on the inflation rate soon returning to 2 percent. But what if it doesn’t? Ip says if inflation remains above targets, the Fed should just raise the targets. He writes:

One strategy [Powell]—or his successor—should consider in that eventuality is to simply raise the target.

And why pursue higher inflation? Ip takes the popular view of the “mythical trade-off between higher employment and inflation,” as Brendan Brown describes it. For Ip, higher inflation is the way to ensure an employment-fueled expansion, and he writes:

Why would higher inflation ever be a good thing? Economic theory says modestly higher, stable inflation should mean fewer and less severe recessions, and less need for exotic tools such as central-bank bond buying, which may inflate asset bubbles. More practically, if inflation ends up closer to 3% than 2% next year, raising the target would relieve the Fed of jacking up interest rates to get inflation down, destroying jobs in the process.

According to Ip, the too-low 2 percent target places the Fed in an intolerable bind. The Fed needs more room to breathe. Rather than feel the pressure to taper just because price inflation has risen above the 2 percent target, Ip wants to make sure the Fed can just keep on with the stimulus until price inflation exceeds 3 percent, or maybe even 4 percent. And who knows? After that, maybe “economic theory” will tell us that 5 percent inflation is an even better target. Certainly, that would be no less arbitrary a number than 4 percent or 2 percent.

How Inflation Fears Put Political Limits on Easy-Money Policies

The need to raise the target rate is essentially political. Presumably, the longer inflation persists above the target rate, the more the Fed will feel pressure to bring inflation back down through some sort of tapering. After all, the adoption of a 2 percent target implies 2 percent is the “correct” inflation rate. Anything higher than that is presumably “too much.” With the Fed moving toward the 2 percent target since the 1996 —and having formally adopted it in 2012—the Fed’s credibility is on the line if the Fed simply ignores the target.

But it’s a safe bet that if the accepted inflation target were increased to 4 percent, we’d be hearing little to nothing right now about tapering, normalization, or any other effort to cut price inflation. The Fed would then be more free to keep the easy money spigot open longer without having to hear complaints that the Fed has “lost control” of price inflation. That would be great for stock prices and real estate prices. Ordinary people, on the other hand, might fare less well. 

  • 1. Brendan Brown, The Case Against 2 Per Cent Inflation: From Negative Interest Rates to a  21st Century Gold Standard, (Cham, Switzerland: Palgrave Macmillan, 2018), p. 8.

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Ryan McMaken is a senior editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelinesfirst.

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In Unprecedented Monetary Overhaul, The Fed Is Preparing To Deposit “Digital Dollars” Directly To “Each American” | Zero Hedge

Posted by M. C. on September 24, 2020

In short, ever since the Fed launched QE and NIRP, it has been making the situation it has been trying to “fix” even worse while blowing the biggest asset price bubble in history.

https://www.zerohedge.com/markets/loretta-mester-hints-fed-preparing-deposit-digital-dollars-directly-each-american

by Tyler Durden
 

Over the past decade, the one common theme despite the political upheaval and growing social and geopolitical instability, was that the market would keep marching higher and the Fed would continue injecting liquidity into the system. The second common theme is that despite sparking unprecedented asset price inflation, prices as measured across the broader economy – using the flawed CPI metric and certainly stagnant worker wages – would remain subdued (as a reminder, the Fed is desperate to ignite broad inflation as that is the only way the countless trillions of excess debt can be eliminated and has so far failed to do so).

The Fed’s failure to reach its inflation target – which prompted the US central bank to radically overhaul its monetary dogma last month and unveil Flexible Average Inflation Targeting (or FAIT) whereby the Fed will allow inflation to run hot without hiking rates – has sparked broad criticism from the economic establishment, even though as we showed in June, deflation is now a direct function of the Fed’s unconventional monetary policies as the lower yields slide, the lower the propensity to spend. In other words, the harder the Fed fights to stimulate inflation, the more deflation and more saving it spurs as a result (incidentally this is not the first time this “discovery” was made, in December we wrote “One Bank Makes A Stunning Discovery – The Fed’s Rate Cuts Are Now Deflationary“).

 

In short, ever since the Fed launched QE and NIRP, it has been making the situation it has been trying to “fix” even worse while blowing the biggest asset price bubble in history.

And having recently accepted that its preferred stimulus pathway has failed to boost the broader economy, the blame has fallen on how monetary policy is intermediated, specifically the way the Fed creates excess reserves which end up at commercial banks instead of “tricking down” all the way to the consumer level.

To be sure, in the aftermath of the covid pandemic shutdowns the Fed has tried to short-circuit this process, and in conjunction with the Treasury it has launched “helicopter money” which has resulted in a direct transfer of funds to US corporations via PPP loans, as well as to end consumers via the emergency $600 weekly unemployment benefits which however are set to expire unless renewed by Congress as explained last week, as Democrats and Republicans feud over which fiscal stimulus will be implemented next.

And yet, the lament is that even as the economy was desperately in need of a massive liquidity tsunami, the funds created by the Fed and Treasury (now that the US operates under a quasi-MMT regime) did not make their way to those who need them the most: end consumers.

Which is why we read with great interest a Bloomberg interview with two former Fed officials: Simon Potter, who led the Federal Reserve Bank of New York’s markets group i.e., he was the head of the Fed’s Plunge Protection Team for years, and Julia Coronado, who spent eight years as an economist for the Fed’s Board of Governors, who are among the innovators brainstorming solutions to what has emerged as the most crucial and difficult problem facing the Fed: get money swiftly to people who need it most in a crisis.

 

The response was striking: the two propose creating a monetary tool that they call recession insurance bonds, which draw on some of the advances in digital payments, which will be wired instantly to Americans.

As Coronado explained the details, Congress would grant the Federal Reserve an additional tool for providing support—say, a percent of GDP [in a lump sum that would be divided equally and distributed] to households in a recession. Recession insurance bonds would be zero-coupon securities, a contingent asset of households that would basically lie in wait. The trigger could be reaching the zero lower bound on interest rates or, as economist Claudia Sahm has proposed, a 0.5 percentage point increase in the unemployment rate. The Fed would then activate the securities and deposit the funds digitally in households’ apps.

As Potter added, “it took Congress too long to get money to people, and it’s too clunky. We need a separate infrastructure. The Fed could buy the bonds quickly without going to the private market. On March 15 they could have said interest rates are now at zero, we’re activating X amount of the bonds, and we’ll be tracking the unemployment rate—if it increases above this level, we’ll buy more. The bonds will be on the asset side of the Fed’s balance sheet; the digital dollars in people’s accounts will be on the liability side.”

Essentially, the Fed is proposing creating a hybrid digital legal tender unlike reserves which are stuck within the financial system, and which it can deposit directly into US consumer accounts. In short, as we summarized “The Fed Is Planning To Send Money Directly To Americans In The Next Crisis“, something we reminded readers of on Monday:

So this morning, as if to confirm our speculation of what comes next, Cleveland Fed president Loretta Mester delivered a speech to the Chicago Payment Symposium titled “Payments and the Pandemic“, in which after going through the big picture boilerplate, Mester goes straight to the matter at hand.

In the section titled “Central Bank Digital Currencies”, the Cleveland Fed president writes that “the experience with pandemic emergency payments has brought forward an idea that was already gaining increased attention at central banks around the world, that is, central bank digital currency (CBDC).”

And in the shocking punchline, then goes on to reveal that “legislation has proposed that each American have an account at the Fed in which digital dollars could be deposited, as liabilities of the Federal Reserve Banks, which could be used for emergency payments.“

But wait it gets better, because in launching digital cash, the Fed would then be able to scrap “anonymous” physical currency entirely, and track every single banknote from its “creation” all though the various transactions that take place during its lifetime. And, eventually, the Fed could remotely “destroy” said digital currency when it so decides. Oh, and in the process the Fed would effectively disintermediate commercial banks, as it would both provide loans to US consumers and directly deposit funds into their accounts, effectively making the entire traditional banking system obsolete. Here are the details:

Other proposals would create a new payments instrument, digital cash, which would be just like the physical currency issued by central banks today, but in a digital form and, potentially, without the anonymity of physical currency. Depending on how these currencies are designed, central banks could support them without the need for commercial bank involvement via direct issuance into the end-users’ digital wallets combined with central-bank-facilitated transfer and redemption services. The demand for and use of such instruments need further consideration in order to evaluate whether such a central bank digital currency would allow for quicker and more ubiquitous payments in times of emergency and more generally. In addition, a range of potential risks and policy issues surrounding central bank digital currency need to be better understood, and the costs and benefits evaluated.

The Federal Reserve has been researching issues raised by central bank digital currency for some time. The Board of Governors has a technology lab that has been building and testing a range of distributed ledger platforms to understand their potential benefits and tradeoffs. Staff members from several Reserve Banks, including Cleveland Fed software developers, are contributing to this effort. The Federal Reserve Bank of Boston is also engaged in a multiyear effort, working with the Massachusetts Institute of Technology, to experiment with technologies that could be used for a central bank digital currency. The Federal Reserve Bank of New York has established an innovation center, in partnership with the Bank for International Settlements, to identify and develop in-depth insights into critical trends and financial technology of relevance to central banks. Experimentation like this is an important ingredient in assessing the benefits and costs of a central bank digital currency, but does not signal any decision by the Federal Reserve to adopt such a currency. Issues raised by central bank digital currency related to financial stability, market structure, security, privacy, and monetary policy all need to be better understood.

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