Fed Inflation Target Is Abnormal

The Fed Fund Rate is at a historic low of 0.25, practically zero.  Why?

abnormal

Because the Fed has an Inflation Target of 2%.  Same as the World’s Central Bankers.

HISTORY

But that is totally abnormal when you look at the historical values of Inflation and the Federal Reserve (Fed) Fund Rate in the United States.

inflation_vs_fedfundrate

The 52 year average for the Fed Fund Rate is 5.45% and for Inflation is 4.01%.

That is a difference of 1.44%.  Notice the Fed Fund Rate is usually above the Inflation Rate.

If the Fed wanted the Inflation Target to be 2%, then the Fed Fund Rate should be 2% plus 1.44% or 3.44%.

Instead the Fed Fund Rate is 0.25% which should drive an Inflation Rate of 0.25% minus 1.44% or negative 1.19%.  That means deflation!  Oops!

For another opinion, look at this:

http://www.marketwatch.com/story/fed-sharpshooters-cant-hit-2-inflation-target-much-less-4-2016-02-18

TROUBLE

Hold onto your hats, Ladies and Gentlemen.

FYI: The Fed Funds Rate is the rate charged banks to borrow money.  The banks in turn charge us 16% to 23% on credit cards for the use of that money.  Ouch!

If you want a better deal involving 6% and no banks, see my website.

https://michaelekelley.com/tag/crowdfunding/

SOLUTION

https://michaelekelley.com/2015/03/27/the-kelley-monetary-policy-rule/

[Thanks to Tyler Durden for the abnormal idea.  Data courtesy of Federal Reserve Economic Data, FRED]

Updated 02/18/2016

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2 thoughts on “Fed Inflation Target Is Abnormal

  1. Pingback: The Kelley Monetary Policy Rule | Michael E Kelley

  2. Pingback: #FederalReserve Is In A Pickle | Michael E Kelley

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