Chicago Fed President Charles Evans wants inflation above 2 percent. Somehow he thinks this will strengthen the economy and bring about full employment. To Evans, more inflation will result in greater demand…and greater demand means more jobs.
Fed policy, according to Evans, should promote higher inflation. Later this month, when new Fed Chair Janet Yellen leads her first Fed policy meeting, we’ll find out if she does too. Based on her track record, she most likely does believe Fed policy should encourage inflation. For example, in 1995, at a Federal Open Market Committee meeting, Yellen argued in favor of allowing inflation to exceed inflation targets for moral reasons…
“Ms. Yellen told the committee that ‘the moral’ of all this is ‘that the Fed should pursue multiple goals,’” recounts the Economic Policy Journal. “She said that ‘when the goals conflict and it comes to calling for tough trade-offs, to me, a wise and humane policy is occasionally to let inflation rise even when inflation is running above target.’”
Wise and humane policies, according to Yellen, are policies that encourage more jobs. To Yellen, and Evans, a trade-off of higher inflation is acceptable. But how to go about it?
We know how former Fed head Bernanke went about creating inflation. He lowered the federal funds rate to practically zero. He also created over $3 trillion from nothing and bought Treasuries and mortgages with it. Despite these radical policies of credit market intervention the results were feeble. The economy didn’t jolt to life…it trudged and plodded along.
“Inflation is always and everywhere a monetary phenomenon,” said Milton Freidman. What he likely meant is that inflation is the increase in the supply of money relative to the supply and demand for goods and services that money is traded for. Rising prices are not inflation; rather they are the effect of an inflated monetary base.
At the moment, Yellen’s in the process of tapering back the Fed’s monthly bond buying program. She’s reducing the rate at which the Fed’s inflating the money base. This is the plan outlined by Bernanke. But who knows if she’ll stay the course…or for how long.
What happens if the soft economic data is not because of bad weather? Will Yellen pause the monthly tapering? Will she reverse it? Perhaps she’ll come up with her own radical new program to bring inflation to the world.
When it comes down to it the very idea that the Fed should be endeavoring to boost inflation is absolutely misguided. To the contrary, stable money should be the goal…not unstable money. Yet policies of inflation result in unstable money. Moreover, policies of inflation are most harmful to the broad population.
Inflation doesn’t help the wage earner. Nor does it help the saver. However, it does help the borrower by lightening their debt burden. Inflation also helps the wealthy by pumping up the prices of their assets.
How the Fed Works to Spoil Your Retirement
In short, inflation acts as a hidden tax on savers and retirees. It devalues the purchasing power of their accounts. Ask any retiree living on a fixed income or a hardworking prudent individual skimping to squirrel away some nuts for retirement…
Policies of inflation are hardly moral and humane…they are a backdoor theft. The Fed’s inflation target is 2 percent per year. Evans wants inflation above that.
However, a 2 percent annual inflation rate is not without consequences. Over a 35 year period it will erode the value of a dollar of savings to 0.50 cents. If you’re planning to retire one day this makes funding it increasingly difficult. Over a 40 year working career inflation of 2 percent will more than cut your initial retirement savings contributions in half.
If you invest your retirement savings in the stock market, there will be some years the market will overcome the 2 percent inflation. Other years it won’t. Even worse, there will be the occasional year the stock market will crash and cut your retirement account in half.
But once retired, the challenge of making your money last really becomes difficult…especially with the Fed working to spoil your retirement. Reducing risk and avoiding a catastrophic capital loss makes overcoming inflation even more difficult. Trying to preserve your savings and stay ahead of inflation is the order of the day. Unfortunately, most people aren’t up to the task.
for Economic Prism