6 ms·

Whats the goal? At what inflation rate will the Fed be happy with?

by altdataseller 4y ago

deleted 4y ago
[deleted]
scrlk 4y ago
The Fed's inflation target is 2%.
eCa 4y ago
2% has been a long time goal. https://www.federalreserve.gov/faqs/economy_14400.htm https://www.federalreserve.gov/faqs/economy_14400.htm
- jollyllama 4y ago
  So they ought to keep hiking it then, if that's truly the goal.
  - curiousllama 4y ago
    More complicated. Inflation expectations, supply chain fixes, fiscal policy, data/reporting lag, etc all play in too. If it's declining, let it decline. Fed can only influence, not dictate, inflation.
    - moistofreason 4y ago
      They can, and have been, printing money like there is no tomorrow… they are literally the only body that can inflate the USD.
      - orwin 4y ago
        No, the states and the federal government can too, by destroying money (IE increasing taxes). Inflation, especially dollar inflation, is more complicated than 'printing more = inflation'.
        altdataseller 4y ago
        I don't nobody loves taxes, and government wastes a lot of money, but doesn't some of that money goes back to the economy via government spending on infrastructure, workers, software, new projects, etc? So how is that destroying money?
        jollyllama 4y ago
        Good question. It's destroying the money to the extent that it's servicing government debt.
        jmoak3 4y ago
        Correct me if I'm wrong, but when servicing gov debt, isn't that money simply distributed to gov debt holders? Looking at https://fiscaldata.treasury.gov/national-debt/ https://fiscaldata.treasury.gov/national-debt/ and https://datalab.usaspending.gov/americas-finance-guide/debt/analysis/ https://datalab.usaspending.gov/americas-finance-guide/debt/... it appears the largest holder is the "public". Is that through treasuries sold by the US gov? If so, we wouldn't be "destroying" money by funding these. The federal reserve has large holdings as well, which I believe it generated buying corporate bonds and MBS during covid - would we be "destroying" money by giving the federal reserve the cash to balance the books on all of those holdings so it can hold them to fruition (after buying them at a loss) without ever having to sell? It could then just toss away all of that money it received to cover the loss. This could work, but I don't know the details or if this is the plan. Just confused, and I've never had a real conversation about this - I hear "print money, tax money" but it seems too simplistic. Do you happen to know?
        jollyllama 4y ago
        I'm not sure as to the specifics of this scenario, but as a general rule, the paying of debt is the destruction of money, because the debt now no longer exists on the balance sheet of the creditor. And I believe that's applicable here.
        4y ago
      - wbsss4412 4y ago
        They stopped printing money last year and have been actively contracting the money supply for several months.
  - queuebert 4y ago
    They will. The market just still doesn't believe it.
timtom39 4y ago
Their target rate is 2%. 8.5% is still the highest we have seen in 40 years. Also, happened during an energy crunch.
deleted 4y ago
[deleted]
not_the_fda 4y ago
The Fed has a target of 2 percent of average inflation, so a long ways to go.
- ajross 4y ago
  Inflation is a year-over-year measurement, not a ladder. Signal in the previous year matters too. If aggregate prices in the economy come down 1.085/1.02 ~= 6.4% from wherever they were a year ago, we're back at baseline. Within a few months the year-old number will start showing some of the elevated prices from last fall. I don't know that anyone necessarily expects to hit 2% exactly, but we'll very likely be looking at "normal" numbers again by the end of the year. Which is exactly what all the folks trying to point out that this was a transitory effect have been trying to say, repeatedly, only to be shouted down by the inflatocaplyse cheerleaders. (FWIW: if prices continue to come down as rapidly as they did this month, the "recession" is likely going to turn out to be a phantom too.)
trident5000 4y ago
2%. Getting off 9% is not hard. Getting below 4% is where we will see what they need to do to hammer it down.
- chaorace 4y ago
  I suspect that everyone (Fed, consumers, government) will be relatively content to float around at 4% YoY CPI for the medium-term now that the "inflation overton window" (if you will) has shifted so much. I can't imagine that policymakers are going to make precisely zeroing in on 2% their first priority given the current market anxiety... but that's ultimately a bridge that will have to be crossed when we collectively get there.
chaorace 4y ago
As others have pointed out, the stated goal is 2%. Keep in mind, however, that the Fed's founding mandate is to balance price stability with unemployment. The mandate takes priority over their stated inflation target, so don't be too surprised if the Fed pivots strategy sooner depending on how the labor market evolves. You should also keep in mind that inflation trends tend to lag behind monetary policy, so the Fed will actually pivot strategies ~6-12 months prior to when the inflation rate is projected to return to 2%. This means that the actual rate we land at will be a lot more imprecise -- potentially as high as 4% or as low as 1% -- while policy gets dialed in. The Fed has historically been fine with a sine-wave pattern of this nature so long as it averages out to 2% over time (there will also probably be some magical thinking in underweighing the past 12 months of extraordinary inflation for the purposes of such averages). One last thing: the Fed typically uses the core PCE for measuring inflation, which excludes food and energy prices, since they're prone to price shocks. The year-over-year core PCE was 4.8% for the month of July. They'll probably choose to overshoot this measure, however, since inflation sentiment over the CPI is highly negative.
- starkd 4y ago
  But they've lost a lot of credibility in being able to make those projections. The inflation-is-transitory call was a major blunder.
  - chaorace 4y ago
    Yes, well... they make their own predictions, so it's not really a matter of whether the public trusts the Fed as long as they are internally unified. Public inflation expectations certainly do play a role in inflation, but, as Volcker showed us in the 80s, it doesn't matter how much credibility you have with the public if you're willing to slam on the brakes hard enough.
    - starkd 4y ago
      But I think a lot of the Fed's strategy was jawboning the rate increases - aka offering "forward guidance". Notice how the rate hikes were fairly measured and tepid. They didn't even start the actual QT until a few months ago. There's a limit to how effective jawboning is, and it requires the public have credibility in the Fed to do so. Eventually, you have to back it up with actions.
tenpies 4y ago
2%, but knowing this administration, it's quite likely that they just change the calculation to something that prints 2% regardless of what inflation is at the moment. For example, based on the pre-1990s CPI calculation, inflation is currently at around 12%. No government's changes to the CPI calculation ever result in a larger inflation number, only lower!
- chii 4y ago
  > but knowing this administration, it's quite likely that they just change the calculation well luckily, it's not the administration that decides the calculation method, the the BLS, and their method is also pretty transparent (https://www.bls.gov/opub/hom/cpi/calculation.htm https://www.bls.gov/opub/hom/cpi/calculation.htm) . Whether you agree with the method is one thing, but that method isn't just changed to suit a political purpose. And if you should so choose, you can look thru the historical methods and changes made, and form your own opinion (https://www.bls.gov/opub/hom/cpi/history.htm https://www.bls.gov/opub/hom/cpi/history.htm).

Whats the goal? At what inflation rate will the Fed be happy with?

deleted 4y ago

[deleted]

scrlk 4y ago

The Fed's inflation target is 2%.

eCa 4y ago

2% has been a long time goal. https://www.federalreserve.gov/faqs/economy_14400.htm https://www.federalreserve.gov/faqs/economy_14400.htm

jollyllama 4y ago
So they ought to keep hiking it then, if that's truly the goal.
- curiousllama 4y ago
  More complicated. Inflation expectations, supply chain fixes, fiscal policy, data/reporting lag, etc all play in too. If it's declining, let it decline. Fed can only influence, not dictate, inflation.
  - moistofreason 4y ago
    They can, and have been, printing money like there is no tomorrow… they are literally the only body that can inflate the USD.
    - orwin 4y ago
      No, the states and the federal government can too, by destroying money (IE increasing taxes). Inflation, especially dollar inflation, is more complicated than 'printing more = inflation'.
      - altdataseller 4y ago
        I don't nobody loves taxes, and government wastes a lot of money, but doesn't some of that money goes back to the economy via government spending on infrastructure, workers, software, new projects, etc? So how is that destroying money?
        jollyllama 4y ago
        Good question. It's destroying the money to the extent that it's servicing government debt.
        jmoak3 4y ago
        Correct me if I'm wrong, but when servicing gov debt, isn't that money simply distributed to gov debt holders? Looking at https://fiscaldata.treasury.gov/national-debt/ https://fiscaldata.treasury.gov/national-debt/ and https://datalab.usaspending.gov/americas-finance-guide/debt/analysis/ https://datalab.usaspending.gov/americas-finance-guide/debt/... it appears the largest holder is the "public". Is that through treasuries sold by the US gov? If so, we wouldn't be "destroying" money by funding these. The federal reserve has large holdings as well, which I believe it generated buying corporate bonds and MBS during covid - would we be "destroying" money by giving the federal reserve the cash to balance the books on all of those holdings so it can hold them to fruition (after buying them at a loss) without ever having to sell? It could then just toss away all of that money it received to cover the loss. This could work, but I don't know the details or if this is the plan. Just confused, and I've never had a real conversation about this - I hear "print money, tax money" but it seems too simplistic. Do you happen to know?
        jollyllama 4y ago
        I'm not sure as to the specifics of this scenario, but as a general rule, the paying of debt is the destruction of money, because the debt now no longer exists on the balance sheet of the creditor. And I believe that's applicable here.
      - 4y ago
    - wbsss4412 4y ago
      They stopped printing money last year and have been actively contracting the money supply for several months.
- queuebert 4y ago
  They will. The market just still doesn't believe it.

timtom39 4y ago

Their target rate is 2%. 8.5% is still the highest we have seen in 40 years. Also, happened during an energy crunch.

deleted 4y ago

[deleted]

not_the_fda 4y ago

The Fed has a target of 2 percent of average inflation, so a long ways to go.

ajross 4y ago
Inflation is a year-over-year measurement, not a ladder. Signal in the previous year matters too. If aggregate prices in the economy come down 1.085/1.02 ~= 6.4% from wherever they were a year ago, we're back at baseline. Within a few months the year-old number will start showing some of the elevated prices from last fall. I don't know that anyone necessarily expects to hit 2% exactly, but we'll very likely be looking at "normal" numbers again by the end of the year. Which is exactly what all the folks trying to point out that this was a transitory effect have been trying to say, repeatedly, only to be shouted down by the inflatocaplyse cheerleaders. (FWIW: if prices continue to come down as rapidly as they did this month, the "recession" is likely going to turn out to be a phantom too.)

trident5000 4y ago

2%. Getting off 9% is not hard. Getting below 4% is where we will see what they need to do to hammer it down.

chaorace 4y ago
I suspect that everyone (Fed, consumers, government) will be relatively content to float around at 4% YoY CPI for the medium-term now that the "inflation overton window" (if you will) has shifted so much. I can't imagine that policymakers are going to make precisely zeroing in on 2% their first priority given the current market anxiety... but that's ultimately a bridge that will have to be crossed when we collectively get there.

chaorace 4y ago

As others have pointed out, the stated goal is 2%. Keep in mind, however, that the Fed's founding mandate is to balance price stability with unemployment. The mandate takes priority over their stated inflation target, so don't be too surprised if the Fed pivots strategy sooner depending on how the labor market evolves. You should also keep in mind that inflation trends tend to lag behind monetary policy, so the Fed will actually pivot strategies ~6-12 months prior to when the inflation rate is projected to return to 2%. This means that the actual rate we land at will be a lot more imprecise -- potentially as high as 4% or as low as 1% -- while policy gets dialed in. The Fed has historically been fine with a sine-wave pattern of this nature so long as it averages out to 2% over time (there will also probably be some magical thinking in underweighing the past 12 months of extraordinary inflation for the purposes of such averages). One last thing: the Fed typically uses the core PCE for measuring inflation, which excludes food and energy prices, since they're prone to price shocks. The year-over-year core PCE was 4.8% for the month of July. They'll probably choose to overshoot this measure, however, since inflation sentiment over the CPI is highly negative.

starkd 4y ago
But they've lost a lot of credibility in being able to make those projections. The inflation-is-transitory call was a major blunder.
- chaorace 4y ago
  Yes, well... they make their own predictions, so it's not really a matter of whether the public trusts the Fed as long as they are internally unified. Public inflation expectations certainly do play a role in inflation, but, as Volcker showed us in the 80s, it doesn't matter how much credibility you have with the public if you're willing to slam on the brakes hard enough.
  - starkd 4y ago
    But I think a lot of the Fed's strategy was jawboning the rate increases - aka offering "forward guidance". Notice how the rate hikes were fairly measured and tepid. They didn't even start the actual QT until a few months ago. There's a limit to how effective jawboning is, and it requires the public have credibility in the Fed to do so. Eventually, you have to back it up with actions.

tenpies 4y ago

2%, but knowing this administration, it's quite likely that they just change the calculation to something that prints 2% regardless of what inflation is at the moment. For example, based on the pre-1990s CPI calculation, inflation is currently at around 12%. No government's changes to the CPI calculation ever result in a larger inflation number, only lower!

chii 4y ago
> but knowing this administration, it's quite likely that they just change the calculation well luckily, it's not the administration that decides the calculation method, the the BLS, and their method is also pretty transparent (https://www.bls.gov/opub/hom/cpi/calculation.htm https://www.bls.gov/opub/hom/cpi/calculation.htm) . Whether you agree with the method is one thing, but that method isn't just changed to suit a political purpose. And if you should so choose, you can look thru the historical methods and changes made, and form your own opinion (https://www.bls.gov/opub/hom/cpi/history.htm https://www.bls.gov/opub/hom/cpi/history.htm).