{"id":43977,"date":"2017-09-18T09:06:59","date_gmt":"2017-09-18T13:06:59","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=43977"},"modified":"2017-09-18T09:06:59","modified_gmt":"2017-09-18T13:06:59","slug":"whats-behind-feds-inflation-obsession","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2017\/09\/whats-behind-feds-inflation-obsession\/","title":{"rendered":"What's Behind the Fed's Inflation Obsession?"},"content":{"rendered":"<p style=\"margin: 0 0;\"><img loading=\"lazy\" decoding=\"async\" src=\"\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350.png\" alt=\"George Yacik - INO.com Contributor - Fed &amp; Interest Rates\" width=\"350\" height=\"131\" class=\"alignleft size-full wp-image-30496\" style=\"padding-top: 10px;\" srcset=\"https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350.png 350w, https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350-300x112.png 300w, https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350-270x100.png 270w\" sizes=\"(max-width: 350px) 100vw, 350px\" \/><\/p>\n<p style=\"margin: 0 0;\"><br style=\"clear:both;\"><\/p>\n<p>The battle lines are being drawn for the Federal Reserve\u2019s monetary policy meeting this week. The prevailing market consensus right now is that no resolution of the debate \u2013 which mainly concerns inflation \u2013 will happen at the meeting, meaning there will be no change in interest rates, and may not be before the end of this year.<\/p>\n<p>One side of the issue, which seems to be the prevailing view at the central bank, was recently promulgated by Fed governor Lael Brainard at a meeting of the Economic Club of New York. \u201cMy own view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,\u201d she said. \u201cWe have been falling short of our inflation objective not just in the past year, but over a longer period as well. What is troubling is five straight years in which inflation fell short of our target despite a sharp improvement in resource utilization.\u201d <\/p>\n<p>The other side, which appears to be the minority opinion, is represented by William Dudley, the president of the New York Fed, who isn\u2019t overly concerned about the current level of inflation. \u201cEven though inflation is currently somewhat below our longer-run objective, I judge that it is still appropriate\u201d to raise interest rates soon, he said recently. \u201cI expect that we will continue to gradually remove monetary policy accommodation.\u201d<!--more--> <\/p>\n<p>The European Central Bank is having the same debate, and the inflation worrywarts are in the majority there, too. At its meeting last week, the ECB raised its economic growth forecasts for the euro currency zone this year to 2.2% from 1.9%, the third straight upward revision. But the recent spike in the euro, which has risen to its highest level since the end of 2014, prompted the bank to lower its inflation forecasts for 2018 and 2019 to well below its 2% target rate \u2013 coincidently, the same target rate as the Fed. <\/p>\n<p>Both central banks are now totally focused on raising inflation to what they deem to be the proper level while almost ignoring the more important gains that have been made in the rest of their respective economies. Economic growth is up; job creation is up, unemployment is down. There\u2019s plenty of evidence that the time has come to start loosening monetary policy, but the masterminds who make monetary policy simply aren\u2019t satisfied. <\/p>\n<p>The question is why? What exactly is so magical about that 2% target rate? This debate over inflation resembles the medieval argument over how many angels can dance on the head of a pin.<\/p>\n<p>I would submit the issue isn\u2019t about how high or low inflation is. Rather it\u2019s all about control. And neither the Fed nor the ECB in Europe, having been given \u2013 or appropriated \u2013 an unprecedented amount of power over the past 10 years, wants to give it up.<\/p>\n<p>This is normal thinking among government technocrats who perceive themselves as indispensable to the public welfare but has been amplified to an extraordinary degree among central bankers who believe they saved civilization from disaster during and after the global financial crisis and can\u2019t imagine life without their guiding hand.<\/p>\n<p>While hardly perfect or back to normal \u2013 whatever that means anymore \u2013 the U.S. economy has clearly improved since the recession, especially recently, as evidenced by the 3% annualized growth rate in GDP in the second quarter. At the same time, the Fed has basically declared victory over unemployment \u2013 one of its two mandates, you\u2019ll remember, in addition to inflation. It has repeatedly indicated that we have reached full employment. Indeed, the Fed\u2019s biggest worry on the jobs front is that the economy is actually in danger of \u201coverheating,\u201d which could cause inflation to spike.<\/p>\n<p>Simultaneously its biggest concern is that inflation is too low. Does that make any sense?<\/p>\n<p>Of course, it doesn\u2019t, which is why this whole debate over inflation is totally phony. <\/p>\n<p>Besides being mainly an academic exercise, what it\u2019s really all about is that the Fed simply doesn\u2019t want to let go of trying to control the U.S. economy. Many, if not most, members of the Fed perceive themselves as the caretakers if not the masterminds directing the economy, and that we are all doomed to lives of poverty and despair if that power is taken away. So with the economy in reasonably good shape, the Fed fears losing that control and is using the fake inflation concern as a justification for maintaining its current tight monetary policy, whether economic reality warrants that or not.<\/p>\n<p>Which is why President Trump\u2019s opportunity to radically reshape the Fed couldn\u2019t have come at a better time. As we know, four members of the Fed\u2019s seven-member board of governors \u2013 including Brainard \u2013 are leaving or have already left, while Janet Yellen\u2019s term as Fed chair ends in February. The Fed is a big part of the Washington swamp that Trump has vowed to drain. Now\u2019s the chance to start the pumps.<\/p>\n<p>Visit back to read my next article! <\/p>\n<p><a href=\"http:\/\/www.ino.com\/blog\/meet-george-yacik\/\" target=\"_blank\">George Yacik<\/a><br \/>\nINO.com Contributor - Fed & Interest Rates<\/p>\n<p><span style=\"font-size: 12px; font-style: italic;\">Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n<!-- AddThis Advanced Settings generic via filter on the_content --><!-- AddThis Share Buttons generic via filter on the_content -->","protected":false},"excerpt":{"rendered":"<p>The battle lines are being drawn for the Federal Reserve\u2019s monetary policy meeting this week. The prevailing market consensus right now is that no resolution of the debate \u2013 which mainly concerns inflation \u2013 will happen at the meeting, meaning there will be no change in interest rates, and may not be before the end [&hellip;]<!-- AddThis Advanced Settings generic via filter on get_the_excerpt --><!-- AddThis Share Buttons generic via filter on get_the_excerpt --><\/p>\n","protected":false},"author":16,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[6824,511,7308,8451,7838,5746,6960,5745,6464,8861],"class_list":["post-43977","post","type-post","status-publish","format-standard","hentry","category-ino-com-contributors","tag-federal-open-market-committee-fomc","tag-federal-reserve","tag-federal-reserve-chair-janet-yellen","tag-fomc-minutes","tag-interest-rate-hike","tag-interest-rate-policy","tag-mario-draghi","tag-monetary-policy","tag-the-european-central-bank-ecb","tag-u-s-inflation-rate"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v23.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What&#039;s Behind the Fed&#039;s Inflation Obsession? 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