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“The Federal Reserve’s relentless pursuit of 2% inflation creates more problems than it solves. The 2% target has become gospel for central bankers. But as former Fed Chairman Paul Volckerpoints out in his new memoir, no economic theory or evidence supports the claim that a little inflation greases the economic wheels or reduces the risks of depressions. In fact, monetary policies that aim for 2% inflation risk contributing to financial bubbles that can trigger real economic collapse when they burst.
The 1978 Full Employment Act gave the central bank a dual mandate, to promote full employment and price stability. The law also established specific targets for reducing unemployment and inflation, which at the time were getting out of hand. Congress mandated that within a decade the Fed should bring unemployment down to 3% and the inflation rate to zero.
The legislation provided some wiggle room. The theory that reducing inflation increases unemployment was still respectable in those days. That’s why Congress gave the Fed permission to take a softer line on inflation if doing so would help bring unemployment down to 3%. That never happened, but 30 years later the Fed still exploits a loophole designed for a 10-year transition to zero inflation.
If Congress had wanted to give the Fed perpetual discretion on inflation, it could have directed the Fed to secure the greatest possible price stability consistent with 3% unemployment. Instead, Congress gave the Fed a precise number (zero), a source from which the data should come (the Bureau of Labor Statistics) and a target date (1988). Moreover, the 1978 bill gave the president—not the Fed—explicit, perpetual authority to propose alternative targets for inflation and unemployment to Congress.”
JJ Best Of The Web
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