The Federal Reserve: Aiming High

Jeff Sommer, the New York Times’ economic columnist, suggests that the Federal Reserve needs to “aim high” regarding inflation. He proposes increasing the current 2% inflation target to 4%, but not at the cost of creating unemployment. However, this is a dangerous view of inflation as it is a silent thief, and even a 2% inflation rate can be detrimental to an individual’s savings.

In January, we highlighted the ongoing debate within the Federal Reserve over whether to increase the inflation target. There were discussions about settling for a 3% or even 4% inflation rate to create a “happy land.” Mr. Sommer claims that these discussions are continuing and becoming crucial.

Before the era of fiat money, America maintained an average annual inflation rate of 0.1%, making even a 2% inflation rate abrupt by comparison, as noted by economist Michael Bordo. But Mr. Sommer insists that a 2% inflation rate is “the sweet spot” for the Federal Reserve.

However, before Richard Nixon removed the last tie between the dollar and gold, Congress took a more conscientious approach to inflation. In 1957, when inflation averaged 3.3%, senators were outraged, with one senator decrying the inflation’s ominous threat to fiscal solvency, sound money, and individual welfare. Yet, even then, inflation seemed to be becoming acceptable, with concerns raised about the temptation to use gradual price increases to suggest an appearance of prosperity.

It is essential to remember Wallace Bennett’s warning that when governments create money faster than their citizens create value, it does not create wealth but only creates inflation, which is the illusion of wealth. Sommer suggests that the 2% inflation target is arbitrary and does not allow sufficient flexibility, but this could damage individuals and society in the long run.

Related Facts

• Before the era of fiat money, America maintained an average annual inflation rate of 0.1%.
• In 1957, inflation averaged 3.3%, and senators were outraged about its threat to fiscal solvency, sound money, and individual welfare.
• There have been debates within the Federal Reserve about increasing the inflation target to 3% or 4%, even though these rates could lead to more significant inflationary problems in the future.

Key Takeaway

The Federal Reserve needs to evaluate its inflation targets to benefit the economy in the long run, as a higher inflation target can lead to inflation’s long-term damage.

Conclusion

The Federal Reserve must consider the long-term effects of inflation, with a higher inflation rate leaving individuals and society more vulnerable to significant damage in the future. Therefore, taking historical precedence is essential, remembering inflation’s threat to fiscal solvency, sound money, and individual welfare, and maintaining caution when considering the Federal Reserve’s inflation targets.