Why, Oh Why, Is the Fed's Inflation Target 2% (a rant)

[Doug Smith]

I would love to get a discussion going over this topic to see what other "in the know" armchair economists think. 

This chart shows mortgage interest rates over the past 30 days. Rates are directly tied to the 10-Year US Treasury which are impacted by not only our market-driven economy, but also government action (or inaction). I’ve been saying for many months that I did not see a path to dramatically lower interest rates like government officials, the media, and many real estate pros were touting. Today’s economic news…heck…economic news for the last several months seem to continually be “worse than expected”. The US Federal Reserve (do they ever really help out or simply get in the way) is notorious for taking action way, way too late. One of my biggest bones that I have to pick with them is this fascination with “2% inflation”. When I studied Econ in college, we used an average 3.1% inflation rate as an assumption. When I was working for banks and did financial planning for customers, we used 3.1% as an assumption. The 2% inflation target was adopted by New Zealand in the 1980s and then other central banks followed suit.

That certainly doesn’t mean that such a low target is a good idea. The Fed under Paul Volcker and Alan Greenspan, there was no 2% target. Ben Bernanke mentioned it and then Janet Yellen and Jerome Powell are all in for 2% inflation. Damn the rest of the economy! The Fed is fixated with 2% inflation, but they are ignoring what is best for average Americans who are just trying to put food on the table. Couple with it the dramatic increase in currency in circulation caused by runaway spending by politicians of both parties and you get even higher inflation. Once again, the Fed is acting too late. Boo Fed! Thank you for indulging my rant.