STAFF NEWS & ANALYSIS
Federal Reserve Interest Rates Are Nonsense
By Daily Bell Staff - February 10, 2017

Fed’s Evans says inflation has to hit 2% for central bank to maintain credibility. Chicago Fed President Charles Evans has forecast two interest rate hikes this year but said he could be comfortable with a third. – Marketwatch

This article goes on about why the Federal Reserve has to raise price inflation in order to remain credible. Its point is that in the 1970s, inflation had to brought down but that in the 2000s it has to be raised.

Ideally the Fed would like to raise inflation to about two percent before working to bring it back down near zero.

The gentleman in question doesn’t exactly explain why inflation needs to be brought up before it can be brought back down, but he is certainly forceful about it.

“I believe the risks are greater that the public doubts our resolve to bring inflation up to 2% than they question our will to bring it back down if we were to overshoot 2% by a meaningful amount.” Chicago Fed President Charles Evans said Thursday that, in 2017, the Fed has to bring inflation up in order not to lose any credibility.

In a speech to the CFA Society of Chicago, Evans said the central bank would damage its standing with investors if it fails to bring inflation up to its 2% target. “I believe the risks are greater that the public doubts our resolve to bring inflation up to 2% than they question our will to bring it back down if we were to overshoot 2% by a meaningful amount,” Evans said.

The article tells us that inflation near two percent is seen as helpful to a developed economy. In face, Japan and the eurozone indicated it is “cheaper and more effective” to bring rates up before pushing them back down.

In fact, Evans believed that the Fed would reach its 2% rate with three years. As part of the Fed’s inflationary bias, he believes the Fed will raise rates two or three times this year.

This makes little sense to us however. We’ve never understood why the Fed ought to strive to reach a certain level of inflation, let alone touch it before moving it back down.

If the Fed didn’t exist, the chances are that rates would stabilize at a low point that would reflect the actual cost of money – what people would charge to lend it.

Additionally, in many cases, the price of technology would continue to go down absent inflation. On the whole then prices for most things would gradually depreciate.

It is regulation that keeps prices high.

The Fed and its enablers want to ensure there is a certain level of interest, and they actually want to shove that interest level up and down. But absent the Fed that interest rate would be stable not fungible.

Conclusion: There is no reason why rates should be jerked all over the place – except that those close to the Fed have to give the central bank something to do. One day central banks will go away and rates will represent the cost of money once more.

 

 

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  • Praetor

    Excellent DB! We need stability, not up down up down jerked this way and then that way and then back that way again. STABILITY and that will be achieved by no more centralized banking system.

    The Keynesian’s do economics by feeling, which is why the economy is up down up down, no lets go this why, no lets go that why. Up Down Up Down, schizophrenic it is.!!!!

  • Doc

    “Fed’s Evans says inflation has to hit 2% for central bank to maintain credibility.”

    What credibility are they referring to? The Feds are trying to forecast their own actions, and aren’t even sure they will raise rates 2 or 3 times. And they claim to be able to forecast the action of millions and billions of people.

    “I believe the risks are greater that the public doubts our resolve to bring inflation up to 2% than they question our will to bring it back down if we were to overshoot 2% by a meaningful amount.”

    So they are not sure they can bring it up, but sure they can bring it down? Are they not in control?

    Are there people that still buy their nonsense? Maybe they deserve it then…

  • ben chifley

    MFFPs differ from ordinary fiscal programs by being money-financed rather than debt-financed To have its full effect, the increase in the money supply must be perceived as permanent by the public what-tools-does-the-fed-have-left-part-3-helicopter-money brookings.edu

  • ben chifley

    In either case, the Fed must pledge that it will not reverse the effects of the MMFP on the money supply a “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money supply what-tools-does-the-fed-have-left-part-3-helicopter-money brookings.edu

  • ben chifley

    ..Fed chairman should be replaced by a computer. Friedman, known as the father of monetarists who believe that the Fed should focus solely on the growth of the money supply washingtonexaminer rand-paul-names-dead-libertarians-milton-friedman-friedrich-hayek-as-favorites-for-top-federal-reserve-job

  • ben chifley

    Yes if the Federal Reserve bank did not exist and was just a computer funny how libertarians never mention that or what Friedman means about interest rates. He is talking about how to create an economic system built by paper on top paper there thing the founding fathers declared a tea party and why everyone before the Fed was created before 1913 funded their state government programs on taxes

  • ben chifley

    The methods that central banks use to meet their interest-rate targets pose further complications. Before the financial crisis, the Fed continuously varied the amount of money in the system (more precisely, the quantity of bank reserves) to keep the funds rate near the desired level. what-tools-does-the-fed-have-left-part-3-helicopter-money brookings.edu

  • ben chifley

    With all the fake news going around people still will not read what Milton Friedman and Ben Bernanke actually say how to create a libertarian economy and what it means!!!!!!

  • ben chifley

    If central banks target interest rates rather than the money supply itself, than it’s not immediately obvious how the idea of a “permanent increase in the money supply” can be made operational. what-tools-does-the-fed-have-left-part-3-helicopter-money what-tools-does-the-fed-have-left-part-3-helicopter-money brookings.edu

  • ben chifley

    More interested in attacking keynes instead attempting to grasp what the article means which is interest rates are meaningless when you are attempting to create a country to live permanently off a Central Bank creating bank notes out of thin air!!!

  • esqualido

    There is nothing nonsensical about Fed interest rates policy: the Too-Big-and-Ever-Growing-Bigger banks that own the Fed would like nothing so much as to perpetuate paying savers nothing, while charging them, as customers, double-digit rates on credit card and other loans, but themselves obtaining funds virtually interest-free, because rates are, well, so low. But the great sucking sound that H. Ross Perot said went with jobs fleeing our shores, could as well apply to funds if some other country regarded as honest started offering savers a decent rate of return: one a hundred times the currently prevailing rate would only be 1% (!!!)

  • ben chifley

    Yes esqualido have you actually ever read Milton Friedman and what he is taking about interest rates or just hack who has his fortune invested in paper? Sending jobs off shore there is a decrease in the money supply causing deflation and a real reason for the fed to go on a bond buying program to stabilize the currency, the economy nothing to do about making countries money or saving business’s money.. this article is about bank policy not economic policy…

  • ben chifley

    Moreover, the increase in the money supply associated with the MFFP should lead to higher expected inflation (channel #3)—a desirable outcome, in this context—than would be the case with debt-financed fiscal policies. what-tools-does-the-fed-have-left-part-3-helicopter-money ben-bernanke brookings.edu

  • ben chifley

    The lesson of the 1970s’ great inflation (13 percent in 1980) is that once prices begin to rise consistently, they feed on themselves. The fallout is disastrous. People and companies can’t plan for the future; recessions become more frequent. Unexpectedly high inflation would probably doom today’s cheap credit policy. The Fed would have to raise rates. Criticism from both left and right would intensify. So, much is riding on Bernanke’s bet: If he loses, we all lose. bernankes-bet-on-jobs-and-inflation washingtonpost.com

  • ben chifley

    Yes if you print money forever you don’t have to big fail banks because they will never run out of money.. how ideological and trusting of people who claim to have read Milton Friedman instead of actually double checking what he actually says with all the fake news is a not good enough

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