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.

[Paul Azad]

I'm not the sharpest tool in the shed, and if you give me a penny for my thoughts you'll get change back, but I grew up in Texas and we're grass fed on personal responsibility down here, so... 

The Congress and President are just doing what we hired them to do, right? We tell them we want $100 bucks worth of stuff every year but we only want to pay $50 bucks for it, so they print money. When any little hiccup comes along that most of us did not financially prepare for we Demand the GuvMint do something, like my stock portfolio dropped 25% today in 10/87, so drop interest rate to Zero, thanks Maestro Greenspan, or again in 3/2000 when Yahoo.com didn't somehow grow into its projected 30 trillion dollar market cap based on its PE of 700, drop rates to Zero and keep 'em there for 22 years except for brief interludes of sanity (inflation got above 2%), or in 2008 when no one with a pension fund in America took any damn responsibility/oversight and gave their retirement funds to crooks to buy whatever ratings agency rubber stamped dogshit inverse synthetic CDO they could get a commission on, then were shocked, laying on their fainting couch clutching their pearls when the financial system reliably imploded, so drop rates to Zero again and start Monetizing/printing the debt, and now with the most predicted pandemic in history, Americans hadn't saved a damn cent so we cried to the GuvMint, send us 7 Trillion dollars now, I need a new Lambo! So we dropped rate to Zero and printed 27% of M2 global US money supply in a few months, more money than made in prior 200 years. Then 2 years later we act good golly surprised that inflation is going up, what, how did that happen? Shut-up 20,000 economists screaming at the top of their lungs for years, we can't hear the banker on our I-phone 14 super Max Pro telling me about the 2.5% variable rate Bridge Loan he can get us for 24 months to buy that 50 unit crack house, grow house, section 8, Multi-Family first time syndication I put together after my Doge coin "investment" shockingly went Tits up! 

ok , I'll settle down, but felt good to get that out

someone , anyone smarter than me once said "We have met the enemy and he is US!" The Treasury Dept is floating 1 Trillion a quarter now in bonds, because we frickin' Told them to, and that huge supply drops price and raises rates, and every year its gettin' worse, and even my math tells me the rate of change is accelerating. Bond market doesn't believe FED is fighting inflation enough, so rates rising, 'cause both core CPI and super core PCE, monthly numbers are rising since September, Yellin gave us mild reprieve with Quarterly Refunding announcement on Nov 1st when she shifted issuance to more Bills than Bonds, but now they are being forced back to more balanced issuance, more Bonds, so rising 10 yr rate again. Also FED has little to no control over 10yr, which is just the projected 10 year real GDP (2.5-2.75% today) plus the projected 10 yr inflation rate (2-2.5%) currently, and of course Cap Rates are typically 150-175 bips above that with a 9-12 month lag.

Many smart economists like Dr Steve Hanke and John Greenwood at Johns Hopkins take the opposite position that 10 yr is going down big time soon, due to M2 money supply contraction of 3.5% over last 2 years, M2 has only contracted 4 times since 1913, and every time there has been a proportional recession. 

It's all a mystery, except one fact. It's probably our fault :)