Tag Archives: federal reserve

Fed Inflation Target of 2% Is Abnormal

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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

UPDATE 2023/01/12

The Fed currently targets inflation of 2% over the longer run as measured by the annual change in the price index for personal consumption expenditures.

‌But Wall Street increasingly sees this goal as unrealistic in a post-pandemic world and that 3% is more realistic.

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 01/12/2023

Federal Reserve Can Create Jobs

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THE FED has increasing employment as part of its charter. Yes, inflation is not the only goal in the charter.

underinvestment As this chart shows,US businesses are NOT INVESTING in capital for the future and consequently few new jobs are being created.

The Center for American Progress (americanprogress.org) has recommended creating a NATIONAL INFRASTRUCTURE BANK to fix our crumbling national infrastructure.

THE FED can use the LENDER OF LAST RESORT powers which allow lending to any institution including states and cities not just the financial institutions which are only using the loans to pump up the stock market.  THE FED could loan to the NATIONAL INFRASTRUCTURE BANK.

States and cities could use the loans for infrastructure which would CREATE JOBS similar to the Civilian Conservation Corps.  For example the Fed could have used these powers to bail out Detroit.

Read about it on wikipedia:

http://en.wikipedia.org/wiki/Federal_Reserve_System#Lender_of_last_resort

Thanks