As the Federal Reserve remains unable to stoke inflation (because it refuses to measure it correctly) and refuses to factor in asset price inflation…
… it has now considered launching a new rule that would let inflation run above its 2% target to make up for lost inflation, reported the Financial Times.
Though the Fed’s policies are to protect big Wall Street banks and keep liquidity ample in the financial system, its policies have overwhelmingly created deflation through supporting zombie companies and blowing financial bubbles.
So to “make up” for lost inflation, the Fed will temporarily increase the target range above 2%, also known as “symmetric” overinflation. The policy would “make it clear that it’s acceptable that to average 2 percent, you can’t have only observations that are below 2 percent,” according to Eric Rosengren, president of the Federal Reserve Bank of Boston, who recently spoke with FT.
Fed members have expressed concerns that reverting the federal funds rate to the zero lower bound will drive inflation expectations lower, a real risk of Japanification, something Albert Edwards is especially concerned about.
Officials have also lamented that the since the fed funds rate is so low compared to history, any recession could make monetary policy ineffective, though there is always the reality that the Fed will merely unleash negative interest rates during the next recession.
Meanwhile, Fed members have been experimenting with new monetary tools ahead of the next downturn. Janet Yellen said the new rule could be like “forward guidance,” which enabled the Fed to pressure short-term interest rates lower. This eventually allowed longer-term rates to fall as well.
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