Central banks in general and the Fed in particular are struggling to understand a world in which they’ve thrown everything they have at the economy without generating ‘beneficial’ inflation. Their confusion can be traced back to some profoundly false assumptions.
Here’s a good overview of the current debate:
Fed ‘should defend’ inflation target or risk losing credibility: Bullard (Reuters) – The Fed needs to mount a clear defense of its 2 percent inflation target and stop raising rates until the pace of price increases strengthens, St. Louis Fed President James Bullard said on Thursday. The central bank risks losing credibility, and perhaps triggering a recession, if it continues to insist on ‘normalization’ and higher interest rates without better evidence that prices are firming, he said in an interview with Reuters.
‘If you are going to have an inflation target you should defend it. If you say you are going to hit the inflation target then you should try to hit it and maintain credibility,’ Bullard said.
Persistent weakness this year in the Fed’s preferred measure of inflation means ‘we more or less lost all the progress that we made the last two years’ toward the 2 percent goal, Bullard said. Continuing to raise interest rates in that environment ‘can send a signal to markets that the inflation target is not that important.’
This post was published at DollarCollapse on OCTOBER 15, 2017.