One thing to watch out for in Janet Yellen’s press conference this afternoon is her mentioning of the Fed’s inflation target. The Fed claims that it wants to target an inflation rate of about two percent, and has been perturbed that it can’t seem to reach that. We know, of course, why they can’t, because prices want to drop. Overinflated prices during the last bubble never were allowed to return to normal levels, with the Fed pumping trillions of dollars into the system to keep prices elevated and stave off the fearsome specter of “deflation.” And yet all those trillions have led only to continued low (official) inflation figures, which the Fed wants to boost.
Those who live and work in the real world and who have to do their own grocery shopping know that official inflation figures significantly under-report actual price increases. Yet the Fed wants those prices to increase even faster. The San Francisco Fed even published a piece last month that was a trial balloon floating the idea of “inflation overshooting.” That means that the Fed would intentionally try to push the inflation rate above its 2% target for an extended period of time. Not surprisingly, the author of the article supported the idea of inflation overshooting.
That would be disastrous for many Americans. With interest rates continuing to remain low, savers have been decimated. Even if the Fed could drive official inflation figures above 2%, its continued accommodative monetary policy will keep interest rates low. This will pinch many people even more than now, as rising prices continue to eat away at savings while the prospects for any decent returns on savings and investment will continue to be dismal. And of course that’s a best-case scenario, assuming that the Fed knows what it’s doing and can operate to return the inflation rate back down to 2% afters its overshooting. That is highly questionable. It wouldn’t be at all surprising to see the Fed going to such lengths to drive prices up that they far overshoot for far too long and end up really messing things up. The long and short of it is that unless you’re a Wall Street fat cat or someone else who gets the use of the Fed’s new money first, the prospects for the future look dim indeed.
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