Federal Reserve wants to make up for lost inflation

The Federal Reserve’s official inflation measurement has been running below two percent for the last decade. They have been trying to raise it to two percent to no avail. Well, unless you measure inflation accurately, which is higher than the two percent figure.

To make up for lost inflation, the central bank has decided to come up with a new policy: allow inflation to increase above two percent to make up for lost time.

Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Financial Times that the Eccles Building will be working with “symmetic” overinflation. He posited that monetary policy needs to “make it clear that it’s acceptable that to average two percent, you can’t have only observations that are below two percent.”

He added:

“Future committees might not be as comfortable with that formulaic approach. This is why I prefer something that is a little bit more flexible, maybe not as constraining, but makes it a little clearer that we should be having [some inflation readings] over 2 percent.

Oy vey!

Zero Hedge makes a good point on this additional unconventional policy:

Fed members have expressed concerns that reverting the federal funds rate to the zero lower bound will drive inflation expectations lower, a real risk of Japanification, something Albert Edwards is especially concerned about.

Officials have also lamented that the since the fed funds rate is so low compared to history, any recession could make monetary policy ineffective, though there is always the reality that the Fed will merely unleash negative interest rates during the next recession.

Meanwhile, Fed members have been experimenting with new monetary tools ahead of the next downturn. Janet Yellen said the new rule could be like “forward guidance,” which enabled the Fed to pressure short-term interest rates lower. This eventually allowed longer-term rates to fall as well.

So far, the Fed has refused to dig any deeper publicly, noting that it is too complex to discuss in an open realm.

Well, all you can say is that it is more bad news.