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.