Inflation - stubbornly hard to kill

[vand]

There's mounting evidence that the tail end of the inflation spike of 2021-23 is proving very fat and stubbornly hard to snuff out-



https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/

- After falling to annualized 3.0% in Jun 2023, it's bobbled around, and the most recent 2 consecutive monthly increases in US CPI data over Feb/Mar 2024, have taken us back to 3.5 annualized%.

- Bond yields have risen back up since the turn of the year - evidently, markets are pricing in higher rates for longer

- Rate cut expectations have been rapidly scaled back

- Commodities have been moving considerably higher, which will feed through to higher cost pressures over the next few months

The last time CPI didn't exceed the 2.0% was back in Feb 2021 - that's over 3 years ago now... As with past inflationary episodes, it's proving very difficult to get back under control. All in all, I think we better get used to the idea that the goldilocks 2.0% target isn't going to get hit any time soon and we will have to put up with ebbs and flows

Will the next move in interest rates be UP? That would be a big shock for many (me included) and would completely destroy the narrative that has fueled much of the recent bull run.

[Dicey]

As someone who's lived through big inflationary cycles before, I understand part of the process is that it creates a "new normal". Not much returns to its old price, therefore, I don't expend any personal energy expecting it to.

Therefore, there's not much point in angsting over it. Those with strong mustachian skills will ride it out fairly easily.

That may reek of privilege to some, but mustachians  have been prepared for events such as this for-evah. We don't have huge car payments and huge houses full of shiny shit. If costs/prices never return to "normal", we'll be fine.

[WayDownSouth]

Interest rate increase before 2025.

Official narrative in coming months:

"Soft landing could be a bit bumpy"
"Nobody ever said a soft landing was guaranteed"
"Public sentiment says we can handle a slighty "bumpier" landing than planned"
"We didn't expect this (insert anything here) to happen exactly the way it did"
"Economic data shows Americans are ready to sustain more transitory inflation prior to rate cuts"
"Bumpy landing could be looking rougher than expected"
"Polls shows economy stable enough to support new potential rate hikes"
"FED says Americans working too much, rate hikes likely imminent"...

Etc., FOREVER.

FED makes money from one thing only, the creation of debt. This is naturally inflationary. The TV and newspapers can say what they want and people can repeat their lies until they're blue in the face but I don't see any serious drops in inflation.

Good post OP because this reality needs to be discussed or at least known about. The whole rate cut idea sounded pretty, and that fueled the market highs we've recently seen. Do the math people. All good things come to an end. In my opinion, it wouldn't be a foolish move to be preparing for an extremely inflationary future.

[vand]

As someone who's lived through big inflationary cycles before, I understand part of the process is that it creates a "new normal". Not much returns to its old price, therefore, I don't expend any personal energy expecting it to.

Therefore, there's not much point in angsting over it. Those with strong mustachian skills will ride it out fairly easily.

That may reek of privilege to some, but mustachians  have been prepared for events such as this for-evah. We don't have huge car payments and huge houses full of shiny shit. If costs/prices never return to "normal", we'll be fine.

Yep, the "new normal" changes the perceptions and peoples' behaviours.  I don't think anyone reasonably well versed in how to interpret CPI really expects prices to go back to pre-2022 levels... but they do have to stop rising at a perceptible pace so that "I remember this being cheaper this time last year" doesn't become the first thing that comes to mind when you are buying your groceries.

Back in the 1970s it could be argued that it was the 2nd spike between 76-82 that really crushed the economy. Better hope we don't get a repeat performance this time.

[ChpBstrd]

In the 70's and 80's, each inflationary spike was followed by a rise in interest rates that brought rates substantially above the previous peak level of inflation. The results were always rapidly falling inflation and a recession.

In 2022-2024, rates did not rise anywhere near the 9% peak rate of inflation. Positive real rates were achieved in 2023 but we never raised overnight rates to 9% or higher. Instead the FFR peaked at 5.5%, so we stopped there. We did not have a theoretical reason for why rates had to exceed the previous peak in inflation, and the pandemic offered lots of reasons to think the underlying causes of inflation were, in fact, transitory - like factory disruptions and supply chain problems.

The hope was that by ending the rate hikes at a lower level than what was done in the 70's and 80's and instead relying on QT to control the money supply, we could avoid those recessionary outcomes. The soft landing looked increasingly likely earlier this year. However, now it appears that wage growth in a tight labor market is propping up inflation in the 3-4% range. So we won the economy battle, but appear unable to use the same strategy to get inflation under 2%.

I think the FOMC's most likely outcome is to sit at the current rate level through the 3rd quarter to see how things play out. For the past 12-16 months, investors have thought at any given time that rate cuts were probably two quarters away. Now, again, they think rate cuts are two quarters away. This is why stocks haven't been discounted. At any given time, the DCF spreadsheets were updated with imminent rate cuts. How long can investors' patience hold? IDK.

[Morning Glory]

I am inclined to believe Robert Reich that price gouging is at least partially responsible here, especially when it comes to commodities like eggs and meat:

https://www.theguardian.com/commentisfree/2024/apr/11/companies-inflation-price-gouging

[vand]

In the 70's and 80's, each inflationary spike was followed by a rise in interest rates that brought rates substantially above the previous peak level of inflation. The results were always rapidly falling inflation and a recession.

In 2022-2024, rates did not rise anywhere near the 9% peak rate of inflation. Positive real rates were achieved in 2023 but we never raised overnight rates to 9% or higher. Instead the FFR peaked at 5.5%, so we stopped there. We did not have a theoretical reason for why rates had to exceed the previous peak in inflation, and the pandemic offered lots of reasons to think the underlying causes of inflation were, in fact, transitory - like factory disruptions and supply chain problems.

The hope was that by ending the rate hikes at a lower level than what was done in the 70's and 80's and instead relying on QT to control the money supply, we could avoid those recessionary outcomes. The soft landing looked increasingly likely earlier this year. However, now it appears that wage growth in a tight labor market is propping up inflation in the 3-4% range. So we won the economy battle, but appear unable to use the same strategy to get inflation under 2%.

I think the FOMC's most likely outcome is to sit at the current rate level through the 3rd quarter to see how things play out. For the past 12-16 months, investors have thought at any given time that rate cuts were probably two quarters away. Now, again, they think rate cuts are two quarters away. This is why stocks haven't been discounted. At any given time, the DCF spreadsheets were updated with imminent rate cuts. How long can investors' patience hold? IDK.

With all the focus on Fed policy, one thing that is underappreciated is the role that fiscal discipline and real spending cuts played to bring down the 1970s inflation.  So far in this cycle we don't have that - Congress still believe they can just spend whatever they want, and absent that restraint you will have excess demand stoking inflation. At the moment the Government spends 4 dollars for every 3 dollars that it collects - there's a school of thought that this deficit needs to be closed for inflation to be bought under control.

[dividendman]

I think this is good news generally. Higher, but not crazy, inflation is fine. The economy is doing well. In fact, I think an ideal situation for stocks is that rates have to remain put because labor, corporate profits, GDP are just humming along and doing too well to justify lowering rates.

So what if it takes another year for or two for inflation to get near 2%? Why is 2% magic? Nobody knows...

Why are rates at this level a bad thing again?

[ChpBstrd]

In the 70's and 80's, each inflationary spike was followed by a rise in interest rates that brought rates substantially above the previous peak level of inflation. The results were always rapidly falling inflation and a recession.

In 2022-2024, rates did not rise anywhere near the 9% peak rate of inflation. Positive real rates were achieved in 2023 but we never raised overnight rates to 9% or higher. Instead the FFR peaked at 5.5%, so we stopped there. We did not have a theoretical reason for why rates had to exceed the previous peak in inflation, and the pandemic offered lots of reasons to think the underlying causes of inflation were, in fact, transitory - like factory disruptions and supply chain problems.

The hope was that by ending the rate hikes at a lower level than what was done in the 70's and 80's and instead relying on QT to control the money supply, we could avoid those recessionary outcomes. The soft landing looked increasingly likely earlier this year. However, now it appears that wage growth in a tight labor market is propping up inflation in the 3-4% range. So we won the economy battle, but appear unable to use the same strategy to get inflation under 2%.

I think the FOMC's most likely outcome is to sit at the current rate level through the 3rd quarter to see how things play out. For the past 12-16 months, investors have thought at any given time that rate cuts were probably two quarters away. Now, again, they think rate cuts are two quarters away. This is why stocks haven't been discounted. At any given time, the DCF spreadsheets were updated with imminent rate cuts. How long can investors' patience hold? IDK.

With all the focus on Fed policy, one thing that is underappreciated is the role that fiscal discipline and real spending cuts played to bring down the 1970s inflation.  So far in this cycle we don't have that - Congress still believe they can just spend whatever they want, and absent that restraint you will have excess demand stoking inflation. At the moment the Government spends 4 dollars for every 3 dollars that it collects - there's a school of thought that this deficit needs to be closed for inflation to be bought under control.

The government is reducing spending too:

2020 spending: $7.72T   31% of GDP
2021 spending: $7.62T   30% of GDP
2022 spending: $6.48T   25% of GDP
2023 spending: $6.13T   23% of GDP

https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/

This reduced spending has generally - but not consistently - translated into reduced deficits because revenue is the other factor. The deficit is way down from 2021 but moved upward in 2023, from $1.38T to $1.7T. The cause for this would have to be on the revenue side.

https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

I think this is good news generally. Higher, but not crazy, inflation is fine. The economy is doing well. In fact, I think an ideal situation for stocks is that rates have to remain put because labor, corporate profits, GDP are just humming along and doing too well to justify lowering rates.

So what if it takes another year for or two for inflation to get near 2%? Why is 2% magic? Nobody knows...

Why are rates at this level a bad thing again?

Yes, the United States' inflation "problem" is rapidly reducing the real cost of our national debt. Arguably it is delaying the day of reckoning or the next debt crisis.

2% is thought to be an ideal number because:

• it is sufficient to discourage cash hoarding and force investment,
• it is not so bad that "menu changing costs" are burdensome,
• it is not sufficient to encourage people to pull ahead purchases,
• it allows for relatively low interest rates compared to the IRR of business projects, and that encourages economic growth,
• it is high enough above zero to be safe from unexpectedly falling into deflation,
• it is only slightly higher than long-term productivity growth.[/li
  

I appreciate the prompt to think through these reasons. They are the consequences of not hitting 2% in 2024.

[GilesMM]

Wages have not kept pace with inflation so until that shoe drops, I wouldn’t hold my breath.

[bacchi]

I think this is good news generally. Higher, but not crazy, inflation is fine. The economy is doing well. In fact, I think an ideal situation for stocks is that rates have to remain put because labor, corporate profits, GDP are just humming along and doing too well to justify lowering rates.

So what if it takes another year for or two for inflation to get near 2%? Why is 2% magic? Nobody knows...

Why are rates at this level a bad thing again?

Yes, the United States' inflation "problem" is rapidly reducing the real cost of our national debt. Arguably it is delaying the day of reckoning or the next debt crisis.

2% is thought to be an ideal number because:

• it is sufficient to discourage cash hoarding and force investment,
• it is not so bad that "menu changing costs" are burdensome,
• it is not sufficient to encourage people to pull ahead purchases,
• it allows for relatively low interest rates compared to the IRR of business projects, and that encourages economic growth,
• it is high enough above zero to be safe from unexpectedly falling into deflation,
• it is only slightly higher than long-term productivity growth.[/li
  

I appreciate the prompt to think through these reasons. They are the consequences of not hitting 2% in 2024.

There's some recency bias going on here. Inflation (CPI-U) averaged around 2.6% in the 00s, almost 3% in the 90s, and 3.7% in the 80s (and that's excluding the high inflation years of 1980 and 1981). It's only been the last 16 years where we've seen annual increases of ~2% (since 2007, which was 4.10%).

An inflation rate of mid-3s isn't that bad, historically.

[EvenSteven]

Wages have not kept pace with inflation so until that shoe drops, I wouldn’t hold my breath.

Looks pretty close to me since Feb 2020

https://www.statista.com/statistics/1351276/wage-growth-vs-inflation-us/

[Telecaster]

With all the focus on Fed policy, one thing that is underappreciated is the role that fiscal discipline and real spending cuts played to bring down the 1970s inflation. 

Not in the United States...

[Telecaster]

An inflation rate of mid-3s isn't that bad, historically.

Pretty close to the long term historical average, actually.  I've been beating on this in the DPOYM Club for years.   If you are lucky enough to get a sub 4% mortgage it meant you would likely be borrowing the money for damn near close to free.   We're living in a period of normal inflation right now.   

[Paper Chaser]

I think this is good news generally. Higher, but not crazy, inflation is fine. The economy is doing well. In fact, I think an ideal situation for stocks is that rates have to remain put because labor, corporate profits, GDP are just humming along and doing too well to justify lowering rates.

So what if it takes another year for or two for inflation to get near 2%? Why is 2% magic? Nobody knows...

Why are rates at this level a bad thing again?

Yes, the United States' inflation "problem" is rapidly reducing the real cost of our national debt. Arguably it is delaying the day of reckoning or the next debt crisis.

2% is thought to be an ideal number because:

• it is sufficient to discourage cash hoarding and force investment,
• it is not so bad that "menu changing costs" are burdensome,
• it is not sufficient to encourage people to pull ahead purchases,
• it allows for relatively low interest rates compared to the IRR of business projects, and that encourages economic growth,
• it is high enough above zero to be safe from unexpectedly falling into deflation,
• it is only slightly higher than long-term productivity growth.[/li
  

I appreciate the prompt to think through these reasons. They are the consequences of not hitting 2% in 2024.

There's some recency bias going on here. Inflation (CPI-U) averaged around 2.6% in the 00s, almost 3% in the 90s, and 3.7% in the 80s (and that's excluding the high inflation years of 1980 and 1981). It's only been the last 16 years where we've seen annual increases of ~2% (since 2007, which was 4.10%).

An inflation rate of mid-3s isn't that bad, historically.

The Fed didn't officially adopt the 2% inflation target until 2012

[nereo]

[  We're living in a period of normal inflation right now.

That’s basically my feeling too

Remember that 2% is the Fed’s target. as in “goal”. 2% is their stated ideal. 3.x percent is not perfect, but pretty ok.

[bthewalls]

If trump got elected and stimulated the economy (tax breaks, etc) would that not endanger possibility of soft landing?

Baz

[vand]

In the 70's and 80's, each inflationary spike was followed by a rise in interest rates that brought rates substantially above the previous peak level of inflation. The results were always rapidly falling inflation and a recession.

In 2022-2024, rates did not rise anywhere near the 9% peak rate of inflation. Positive real rates were achieved in 2023 but we never raised overnight rates to 9% or higher. Instead the FFR peaked at 5.5%, so we stopped there. We did not have a theoretical reason for why rates had to exceed the previous peak in inflation, and the pandemic offered lots of reasons to think the underlying causes of inflation were, in fact, transitory - like factory disruptions and supply chain problems.

The hope was that by ending the rate hikes at a lower level than what was done in the 70's and 80's and instead relying on QT to control the money supply, we could avoid those recessionary outcomes. The soft landing looked increasingly likely earlier this year. However, now it appears that wage growth in a tight labor market is propping up inflation in the 3-4% range. So we won the economy battle, but appear unable to use the same strategy to get inflation under 2%.

I think the FOMC's most likely outcome is to sit at the current rate level through the 3rd quarter to see how things play out. For the past 12-16 months, investors have thought at any given time that rate cuts were probably two quarters away. Now, again, they think rate cuts are two quarters away. This is why stocks haven't been discounted. At any given time, the DCF spreadsheets were updated with imminent rate cuts. How long can investors' patience hold? IDK.

With all the focus on Fed policy, one thing that is underappreciated is the role that fiscal discipline and real spending cuts played to bring down the 1970s inflation.  So far in this cycle we don't have that - Congress still believe they can just spend whatever they want, and absent that restraint you will have excess demand stoking inflation. At the moment the Government spends 4 dollars for every 3 dollars that it collects - there's a school of thought that this deficit needs to be closed for inflation to be bought under control.

The government is reducing spending too:

2020 spending: $7.72T   31% of GDP
2021 spending: $7.62T   30% of GDP
2022 spending: $6.48T   25% of GDP
2023 spending: $6.13T   23% of GDP

https://fiscaldata.treasury.gov/americas-finance-guide/federal-spending/

This reduced spending has generally - but not consistently - translated into reduced deficits because revenue is the other factor. The deficit is way down from 2021 but moved upward in 2023, from $1.38T to $1.7T. The cause for this would have to be on the revenue side.

https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/

As % of GDP the deficit is running higher than at any point other than:

WW2 1942-46, GFC 2009-2012, Covid 2020-21


https://fred.stlouisfed.org/series/FYFSGDA188S

It's an unprecedented level of "good time" spending.


...some cool sites around on this stuff, though a lot of it in nominal terms...

https://bipartisanpolicy.org/report/deficit-tracker/

[vand]

Forbes: don't ignore what the gold price is telling us

https://www.youtube.com/watch?v=NMEdwC5-35Y

He gives the deficit spending a mention right at the end, too

[reeshau]

[  We're living in a period of normal inflation right now.

That’s basically my feeling too

Remember that 2% is the Fed’s target. as in “goal”. 2% is their stated ideal. 3.x percent is not perfect, but pretty ok.

The 2% target is also not the product of reams of scientific study.  It came about after it worked for New Zealand.  After this one (albeit extreme at the time) example, other countries began adopting it.  While you can't exactly have a "control case" country set up for experimentation, the evidence is that 2% has worked in the past, not that it is supremely ideal compared to, say, 3%; or 1%.

I think the effectiveness is more about the image that the central bank can steer the economy at all--that it will be what we say it will be--rather than to have the participants in the economy believe that it is a complex, chaotic machine that could drift into any number of scenarios.

[nereo]

[  We're living in a period of normal inflation right now.

That’s basically my feeling too

Remember that 2% is the Fed’s target. as in “goal”. 2% is their stated ideal. 3.x percent is not perfect, but pretty ok.

The 2% target is also not the product of reams of scientific study.  It came about after it worked for New Zealand.  After this one (albeit extreme at the time) example, other countries began adopting it.  While you can't exactly have a "control case" country set up for experimentation, the evidence is that 2% has worked in the past, not that it is supremely ideal compared to, say, 3%; or 1%.

I think the effectiveness is more about the image that the central bank can steer the economy at all--that it will be what we say it will be--rather than to have the participants in the economy believe that it is a complex, chaotic machine that could drift into any number of scenarios.

I'm having difficulty finding it right now, but there was a pretty good discussion several years back on Bogelheads about how the inflation target might be better if it were 2.5% - 3%.  IIRC the main reason against this shift was psychological (the 'supermarket pricing' impact on consumers) but there was a long list of reasons to want slightly higher inflation, including pushing more cash off the sidelines and into R&D, having more 'wiggle room' between the target and the dreaded "deflationary spiral", the idea that fundamentally 3% is no worse than 2% if our economy accepts that as "normal" and does things like COLA adaptation, etc.

Back to my earlier point:  I'm feeling pretty good with inflation anywhere between 2-4%.  Lower and my strategic debt strategy doesn't work out quite so well.  Much higher and we have to seriously consider an inflationary spiral.  But 3.x% is manageable in perpetuity.

[ChpBstrd]

[  We're living in a period of normal inflation right now.

That’s basically my feeling too

Remember that 2% is the Fed’s target. as in “goal”. 2% is their stated ideal. 3.x percent is not perfect, but pretty ok.

The 2% target is also not the product of reams of scientific study.  It came about after it worked for New Zealand.  After this one (albeit extreme at the time) example, other countries began adopting it.  While you can't exactly have a "control case" country set up for experimentation, the evidence is that 2% has worked in the past, not that it is supremely ideal compared to, say, 3%; or 1%.

I think the effectiveness is more about the image that the central bank can steer the economy at all--that it will be what we say it will be--rather than to have the participants in the economy believe that it is a complex, chaotic machine that could drift into any number of scenarios.

I'm having difficulty finding it right now, but there was a pretty good discussion several years back on Bogelheads about how the inflation target might be better if it were 2.5% - 3%.  IIRC the main reason against this shift was psychological (the 'supermarket pricing' impact on consumers) but there was a long list of reasons to want slightly higher inflation, including pushing more cash off the sidelines and into R&D, having more 'wiggle room' between the target and the dreaded "deflationary spiral", the idea that fundamentally 3% is no worse than 2% if our economy accepts that as "normal" and does things like COLA adaptation, etc.

Back to my earlier point:  I'm feeling pretty good with inflation anywhere between 2-4%.  Lower and my strategic debt strategy doesn't work out quite so well.  Much higher and we have to seriously consider an inflationary spiral.  But 3.x% is manageable in perpetuity.

Sometimes I feel gaslit because I swear when I was taking macroeconomics in 2009 the prof talked about lots of research suggesting that 3% was the ideal inflation rate. Then the Fed started explicitly targeting 2% and I never heard anyone seriously talking about 3% again. Perhaps the 20-teens era of too-low inflation led people toward more achievable goals.

It is thought that rich people and conservatives are more concerned about inflation than working class people and liberals because the former have lots of inflation-vulnerable assets in cash or low-yielding bonds, or are generally more focused on working to produce future spending rather than current spending. Workers, OTOH, are more concerned about the risks of layoffs and recession due to overly-restrictive interest rate policy. Therefore, conservatives tend to be inflation hawks and liberals inflation doves. This might explain why George W. Bush appointee Ben Bernanke instituted inflation targeting at the 2% level instead of at 3% in 2012, or why Obama appointee Janet Yellen was less concerned about inflation in mid-2021.

Trump-appointee Jerome Powell is kind of an enigma when seen through this lens. He was on team transitory in 2021, then became the most aggressive rate-hiker since Reagan-appointee Paul Volker, then halted the rate hikes far below the peak in rates, and now appears eager to cut rates. Perhaps he is more of a balanced, independent thinker than he is given credit for?

See, there's always something nice to say about anybody :)

[dividendman]

So, I think we generally agree there is nothing special about a 2% inflation rate besides the fact that the Fed wants to get there eventually, or uses it as a target anyway.

Another good thing about higher interest rates for long-term investors is that capital use/allocation is generally more efficient as enterprises have to increase productivity to compete with the prevailing interest rates for capital.

I'm sticking by my current thoughts that everything is pretty good right now. Interest (and inflation) rates at this level or slightly higher/lower for a long period of time is going to result in a better economy and more gains for stockholders (and bondholders) than near-zero rates.

Finally, high 3.x% inflation rates (or higher) is going to help the federal balance sheet... and it needs help. Since we aren't going to increase taxes ever and now neither party wants to cut entitlements, this is pretty much necessary to get the federal debt under control.

If you think about it, inflation is kind of a super-hero :)

[vand]

I agree there is nothing particularly special about 2% inflation target except one point, which is ultimately the most important point:  it's the official target that has been set. If the policymakers can't meet their self-chosen target, it completely undermines their credibility to be able to exert influence and control as over anything else they claim.

[ChpBstrd]

If you think about it, inflation is kind of a super-hero :)

I agree, but it really pisses off the voters and so we get hawkish policy and the recessions that come with it.

[dividendman]

I agree there is nothing particularly special about 2% inflation target except one point, which is ultimately the most important point:  it's the official target that has been set. If the policymakers can't meet their self-chosen target, it completely undermines their credibility to be able to exert influence and control as over anything else they claim.

Does it though? Since the policy was established in 2012 we've had almost half the years of sub 1% inflation. I don't recall anyone questioning the credibility of the Fed any more than usual back then. So... why can we miss on the downside by 1.5% and be fine... but not on the upside? The answer is there is no reason. Near zero inflation is, in my opinion, way worse than higher inflation.

[Telecaster]

I'm having difficulty finding it right now, but there was a pretty good discussion several years back on Bogelheads about how the inflation target might be better if it were 2.5% - 3%.  IIRC the main reason against this shift was psychological (the 'supermarket pricing' impact on consumers) but there was a long list of reasons to want slightly higher inflation, including pushing more cash off the sidelines and into R&D, having more 'wiggle room' between the target and the dreaded "deflationary spiral", the idea that fundamentally 3% is no worse than 2% if our economy accepts that as "normal" and does things like COLA adaptation, etc.

Back to my earlier point:  I'm feeling pretty good with inflation anywhere between 2-4%.  Lower and my strategic debt strategy doesn't work out quite so well.  Much higher and we have to seriously consider an inflationary spiral.  But 3.x% is manageable in perpetuity.

That's Krugman's theory too.   Part of it is that in the event of a recession it gives the Fed room to lower rates.   As we saw from about 2009-2015 rates were effectively at zero but there was still high unemployment.   On the flip you, people also want price stability, so 2% is the compromise number.   

I agree there is nothing particularly special about 2% inflation target except one point, which is ultimately the most important point:  it's the official target that has been set. If the policymakers can't meet their self-chosen target, it completely undermines their credibility to be able to exert influence and control as over anything else they claim.

No one believes the Fed has such power they can control the economy that tightly.    However, having targets gives clarity to the public what the Fed is likely to do.  For example, we know inflation is above the target, so the Fed is unlikely to cut rates.   

[nereo]

I agree there is nothing particularly special about 2% inflation target except one point, which is ultimately the most important point:  it's the official target that has been set. If the policymakers can't meet their self-chosen target, it completely undermines their credibility to be able to exert influence and control as over anything else they claim.

Is it?  Because IIRC the 2% is the “talked about” goal but no where in the congressional mandate for the Fed does it list 2.0% as the true target. Just that the fed should aim for monetary policy which keeps prices under control and growth high. They have said that a 2% long term target is consistent with this mandate, but they could just as easily say they have reviewed the last century+ of trends and conclude that a 3% long term target is equally good.

2% is not this “magic number”

So whynot take an historical viewpoint?

[vand]

I agree there is nothing particularly special about 2% inflation target except one point, which is ultimately the most important point:  it's the official target that has been set. If the policymakers can't meet their self-chosen target, it completely undermines their credibility to be able to exert influence and control as over anything else they claim.

Is it?  Because IIRC the 2% is the “talked about” goal but no where in the congressional mandate for the Fed does it list 2.0% as the true target. Just that the fed should aim for monetary policy which keeps prices under control and growth high. They have said that a 2% long term target is consistent with this mandate, but they could just as easily say they have reviewed the last century+ of trends and conclude that a 3% long term target is equally good.

2% is not this “magic number”

So whynot take an historical viewpoint?

Your logic baffles me, seriously.  Were they wasting their time for the last 12years then and aiming for the wrong number? Either they lose credibility because they don't have the ability to return inflation to target, or they lose credibility for changing the target to fit whatever narrative their policies result in.  Either way it doesn't work for them.

[WayDownSouth]

I agree there is nothing particularly special about 2% inflation target except one point, which is ultimately the most important point:  it's the official target that has been set. If the policymakers can't meet their self-chosen target, it completely undermines their credibility to be able to exert influence and control as over anything else they claim.

Is it?  Because IIRC the 2% is the “talked about” goal but no where in the congressional mandate for the Fed does it list 2.0% as the true target. Just that the fed should aim for monetary policy which keeps prices under control and growth high. They have said that a 2% long term target is consistent with this mandate, but they could just as easily say they have reviewed the last century+ of trends and conclude that a 3% long term target is equally good.

2% is not this “magic number”

So whynot take an historical viewpoint?

Your logic baffles me, seriously.  Were they wasting their time for the last 12years then and aiming for the wrong number? Either they lose credibility because they don't have the ability to return inflation to target, or they lose credibility for changing the target to fit whatever narrative their policies result in.  Either way it doesn't work for them.

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

[Telecaster]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

The only goal?  What about the dual mandate?   

There is a bit of revisionist history in this thread.  Yes the 2% target originated in New Zealand back in the late 1980s.   So why does anybody care what a tiny of country of five million people did 35 years ago?   The story is that some rando said something on a TV program that nobody outside the country saw, and then central banks around the world panicked and fell in line.  That's really the story?  Does that sound plausible to anyone? 

Of course not.  That story doesn't make any sense.    The real answer is:  The 2% inflation target worked well in New Zealand.   It was measurably good economic policy.   So other central banks adopted it, and it worked out in those countries too.   The Fed was pretty late in the game in this regard.  There are a number of reasons why the Fed was late.  One was that Bernanke and several of the other governors were from the Milton Freedman/Paul Volker school who believed the correct rate of inflation is 0%.    Another is that inflation targets are not part of the dual mandate, and therefore the Fed should not have a target, period.     On other hand, having some inflation preserves jobs in economic downturns, so maybe it is part of the dual mandate.  After discussing it for a few decades, the Fed concluded a 2% target was appropriate. 

Economics, being the dismal science, means that there are plenty of esteemed economists who think the 2% target is wrong.  Some believe the target should be 0%.  Some believe it should be 3-4% to give central banks more flexibility in the event of a recession.   So, plenty of smart people disagree with the 2% target for different reasons, but none of those reasons are some rando said something arbitrary on TV 35 years ago. 

As an aside, although the Federal Reserve is tasked with creating money, the debt is created the moment Congress appropriates the money.  For example, there are about 3 million federal employees who expect a paycheck each month.   If the Treasury doesn't have money to pay them, they are still owed the money.  So the debt exists either way.   Either to the employees or to the bond holders.   So point the finger at Congress on this one.   

[reeshau]

So, plenty of smart people disagree with the 2% target for different reasons, but none of those reasons are some rando said something arbitrary on TV 35 years ago. 

That isn't quite the story.  The part about the TV interview is that the New Zealand's finance minister pulled 2% out of thin air at the time, to give people some expectation of improvement.  To quote the article I cited:

"There were some concerns that a target would lead to higher employment, but the main opposition to the inflation target was in the hospital at the time. Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed 'It was almost a chance remark,' and 'The figure was plucked out of the air to influence the public’s expectations '(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room."

So, that's how it went from Zero to One.  (Meaning, its first use)

Then, after it worked, it has been picked up by majors player the world over, based on this single positive result, and no theory behind it, other than the Milton Friedman view of zero.  The effects of 3%, for example, is uncharted territory--meaning it could be better, it could be worse, or it could make no difference.

[ChpBstrd]

If the Fed ever hits their 2% target and sustains it for a few years, we'll be able to measure the effects and debate the policy against, say, 3%.

Of course, another thing Milton Friedman would have said is that we don't have exact measurements of policy effects, and can't see the real time effects because of long and variable lags anyway. Friedman advocated simple policy guidelines rather than deluding ourselves into thinking we have more control or information than we do.

Interestingly, Fed Vice Chair Phillip Jefferson brought up these points during a talk he gave today. The thoughts of Federal Reserve officials and commenters on a web forum converge on the inherent difficulties of the dismal science.

[Telecaster]

So, plenty of smart people disagree with the 2% target for different reasons, but none of those reasons are some rando said something arbitrary on TV 35 years ago. 

That isn't quite the story.  The part about the TV interview is that the New Zealand's finance minister pulled 2% out of thin air at the time, to give people some expectation of improvement.  To quote the article I cited:

"There were some concerns that a target would lead to higher employment, but the main opposition to the inflation target was in the hospital at the time. Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed 'It was almost a chance remark,' and 'The figure was plucked out of the air to influence the public’s expectations '(Irwin, 2014). They used this number as a starting point and pushed it up to 2% to give themselves a bit more room."

So, that's how it went from Zero to One.  (Meaning, its first use)

Then, after it worked, it has been picked up by majors player the world over, based on this single positive result, and no theory behind it, other than the Milton Friedman view of zero.  The effects of 3%, for example, is uncharted territory--meaning it could be better, it could be worse, or it could make no difference.

Well, no.  The comment might have been offhand, but there is theory behind it.  It beggers the imagination that no central banks ever stopped to examine the 2% target and just followed New Zealand's example blindly with no foundational reasons to do so.   

Your quote references a 2014 NYT article by Neil Irwin, who IMO is one of the best, maybe the best, financial writer of our time.   He's written a lot about how the 2% target came to be and the thinking behind it and tracked this topic over the decades.  The Federal Reserve itself has issued a number of statements over the years about their thinking behind this issue.   Saying there is no theory behind it when there is voluminous amount of explanation over decades again beggers the imagination. 

I want to be 100% clear:  Lots of very smart people disagree with the 2% target, both up and down.  But saying there is no theory behind it is in direct contradiction of objective reality. 

[Telecaster]

If the Fed ever hits their 2% target and sustains it for a few years, we'll be able to measure the effects and debate the policy against, say, 3%.

Of course, another thing Milton Friedman would have said is that we don't have exact measurements of policy effects, and can't see the real time effects because of long and variable lags anyway. Friedman advocated simple policy guidelines rather than deluding ourselves into thinking we have more control or information than we do.

Interestingly, Fed Vice Chair Phillip Jefferson brought up these points during a talk he gave today. The thoughts of Federal Reserve officials and commenters on a web forum converge on the inherent difficulties of the dismal science.

^ Well worth reading.  He states the obvious and says they don't actually know what the economy is doing on a granular level.  No one does.  This by the way, is the same basic argument then governor Janet Yellen used for the 2% target as opposed to 0% which was advocated by Bernanke et. al. at the time.  If you are wrong--and you will be wrong--it is better to be wrong on the side of a little inflation than no inflation. 

[dividendman]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

[vand]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

You are only looking at the income statement and not at the balance sheet:

huge Federal budget deficit
huge public trade decifit
record Debt/GDP

If your economy grew $10bn but your debt went up by $20bn did you really grow? hmm..

People become blindsided and say that a country doesn't need to pay back its debt.. welll, they may be able to roll it over easier than a household, but I happen to also subscribe to the idea that no entity, individual, state or country, that has an unlimited line of credit with the rest of the world (sure, I know the US is far from unique in this department, which is what makes it all the more fascinating)

[reeshau]

I want to be 100% clear:  Lots of very smart people disagree with the 2% target, both up and down.  But saying there is no theory behind it is in direct contradiction of objective reality.

I agree there has been lots of thought on the 2% goal.  To be a scientific theory, though, it has to predict future outcomes, and be stated in a way that can be disproven.  The 2% goal has none of that.  It is not known to be the optimal value, through active comparison with a number of other values.  It's probably close to it.

Maybe I should signal my strict definition of Theory by capitalizing it.

I would say it is merely the conventional wisdom of central banks today.  And its origin came from a seat-of-the-pants maneuver by a small country in a difficult position.  Necessity is the mother of invention,

[vand]

There is plenty of reasoning, at least in the mind of central bankers, why they would want 2% inflation.

Regurgitating this post:
https://forum.mrmoneymustache.com/investor-alley/stocks-are-not-an-inflation-hedge/msg2611510/#msg2611510



What does this tell us? Roughly, that 2% is the inflation rate that is most attractive for private capital to be deployed into risk-on assets - with more capital available to companies that should spur the most economic activity/growth.

[ChpBstrd]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

You are only looking at the income statement and not at the balance sheet:

huge Federal budget deficit
huge public trade decifit
record Debt/GDP

If your economy grew $10bn but your debt went up by $20bn did you really grow? hmm..

People become blindsided and say that a country doesn't need to pay back its debt.. welll, they may be able to roll it over easier than a household, but I happen to also subscribe to the idea that no entity, individual, state or country, that has an unlimited line of credit with the rest of the world (sure, I know the US is far from unique in this department, which is what makes it all the more fascinating)

The next level down in the analysis is adding back 2% real depreciation of one's $34 trillion national debt. That's like $680B of real debt relief thanks to inflation.

[reeshau]

There is plenty of reasoning, at least in the mind of central bankers, why they would want 2% inflation.


What does this tell us? Roughly, that 2% is the inflation rate that is most attractive for private capital to be deployed into risk-on assets - with more capital available to companies that should spur the most economic activity/growth.

2% vs. 0% or 5%?  Sure.  Vs. 3%?  Looks like the maximum of that curve is 2.5%.  And there is quite a fat cluster there, with a lot of downside situations, too.

This precision is particularly relevant, now.

[dividendman]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

You are only looking at the income statement and not at the balance sheet:

huge Federal budget deficit
huge public trade decifit
record Debt/GDP

If your economy grew $10bn but your debt went up by $20bn did you really grow? hmm..

People become blindsided and say that a country doesn't need to pay back its debt.. welll, they may be able to roll it over easier than a household, but I happen to also subscribe to the idea that no entity, individual, state or country, that has an unlimited line of credit with the rest of the world (sure, I know the US is far from unique in this department, which is what makes it all the more fascinating)

The next level down in the analysis is adding back 2% real depreciation of one's $34 trillion national debt. That's like $680B of real debt relief thanks to inflation.

Yeah, the balance sheet issues aren't great... but it's a relative game. If you're a better, more stable, country, than your peers you can get away with a "bad" balance sheet. And like ChpBstrd says here and I said above, inflation is good for the balance sheet since our politicians don't want to raise taxes or cut services. So... we need higher inflation, it's good for us as it's the only medicine we'll take.

[WayDownSouth]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

The only goal?  What about the dual mandate?   

There is a bit of revisionist history in this thread.  Yes the 2% target originated in New Zealand back in the late 1980s.   So why does anybody care what a tiny of country of five million people did 35 years ago?   The story is that some rando said something on a TV program that nobody outside the country saw, and then central banks around the world panicked and fell in line.  That's really the story?  Does that sound plausible to anyone? 

Of course not.  That story doesn't make any sense.    The real answer is:  The 2% inflation target worked well in New Zealand.   It was measurably good economic policy.   So other central banks adopted it, and it worked out in those countries too.   The Fed was pretty late in the game in this regard.  There are a number of reasons why the Fed was late.  One was that Bernanke and several of the other governors were from the Milton Freedman/Paul Volker school who believed the correct rate of inflation is 0%.    Another is that inflation targets are not part of the dual mandate, and therefore the Fed should not have a target, period.     On other hand, having some inflation preserves jobs in economic downturns, so maybe it is part of the dual mandate.  After discussing it for a few decades, the Fed concluded a 2% target was appropriate. 

Economics, being the dismal science, means that there are plenty of esteemed economists who think the 2% target is wrong.  Some believe the target should be 0%.  Some believe it should be 3-4% to give central banks more flexibility in the event of a recession.   So, plenty of smart people disagree with the 2% target for different reasons, but none of those reasons are some rando said something arbitrary on TV 35 years ago. 

As an aside, although the Federal Reserve is tasked with creating money, the debt is created the moment Congress appropriates the money.  For example, there are about 3 million federal employees who expect a paycheck each month.   If the Treasury doesn't have money to pay them, they are still owed the money.  So the debt exists either way.   Either to the employees or to the bond holders.   So point the finger at Congress on this one.

FED cannot survive or keep the country/market/economy alive without the continual and perpetual creation of inflationary debt. That's the way central banks work. They don't function as they should or could or ought to - as a tool to help society, or at minimum benevolent institutions based on factual honest data and a genuine goal of creating a better financial future for all.

I would hate to see what their real balance sheet looks like. I suppose if you can't see the writing on the wall there's no point in looking for it.

Also, they don't answer to congress. I believe they answer to nobody. That doesn't mean they're not open to requests for money, though.

[Financial.Velociraptor]

I did my undergrad in Econ in the late 90s when the idea of a 2% target was new enough our out of date textbooks still called for 0%.  We had a few lectures that introduced the idea of low but non zero target as being somehow "better".  I was skeptical at the time as I was a pure Friedman style Monetarist at the time.  It has been frightening and fascinating to watch the Fed play with ZIRP, QE/QT, and what I think is a tacit acceptance of some of Mosler's work. 

So, the idea of 2% target was present academically at least as far back as 1997.  We never got particularly deep into it though because the 1998 currency crisis was the hot topic.  Flooding markets with liquidity was considered essential to keep the whole global economy from disintegrating.  That idea came back with a vengeance in 2008 and again for 2020/COVID.     

[ChpBstrd]

I did my undergrad in Econ in the late 90s when the idea of a 2% target was new enough our out of date textbooks still called for 0%.  We had a few lectures that introduced the idea of low but non zero target as being somehow "better".  I was skeptical at the time as I was a pure Friedman style Monetarist at the time.  It has been frightening and fascinating to watch the Fed play with ZIRP, QE/QT, and what I think is a tacit acceptance of some of Mosler's work. 

So, the idea of 2% target was present academically at least as far back as 1997.  We never got particularly deep into it though because the 1998 currency crisis was the hot topic.  Flooding markets with liquidity was considered essential to keep the whole global economy from disintegrating.  That idea came back with a vengeance in 2008 and again for 2020/COVID.   

I think of MMT actually as an offshoot of Reaganomics.

Reagan cut taxes and increased government spending, so that both would stimulate the economy. Meanwhile, Paul Volker (a Jimmy Carter nominee) was hiking the FFR to 19% to stamp out inflation. So already we have the following ingredients:

• borrow from the future to stimulate demand now
• use monetary policy to offset inflationary effects of fiscal policy, rather than adapting fiscal policy to control inflation
• assumption we can rely on inflation to maintain a steady debt/GDP over time and it'll turn out all right

The trick worked and Reagan/Volker were credited with ending the stagflation and returning the US to growth.

The ballooning national debt started attracting attention in the early 90s (see Ross Perot) but rates kept falling, indicating surging demand for treasuries, so it was hard to say the national debt was a problem. A surging trade deficit (see globalization) created additional demand for US treasuries. The day of reckoning deficit hawks warned us about for 40 years has still never materialized. If anything, the growth of the national debt was counter-correlated with the steady fall in inflation for decades, contradicting all economic orthodoxy. There was clearly something wrong with our theories.

This is where Mosler enters the discussion - trying to explain how monetarism and classical economics failed to predict the outcomes of the previous 40 years of deficits and ballooning national debt. I don't think his ideas were as groundbreaking as sometimes assumed. He had lived through an entire generation breaking the rules, and simply proposed that after 40 years of it, perhaps this could continue quite a while longer. Arthur Laffer was a radical. Mosler not so much.

The historically brief 2021-23 inflation surge only happened amid a global pandemic when helicopter money was employed. This distribution of cash was different than previous federal deficits, or even the bank bailouts of 2008-2009, because it went directly to working class people with the greatest propensity to spend. Turns out it matters where the helicopter drops the money.

So perhaps the lower economic classes will never again get a Keynesian stimulus like that in the next crisis, unless the economy is mired in deflation. For regular recessions and liquidity crunches, I expect policymakers to return to the 2008-2009 script, which is remembered as working perfectly even if it was followed by years of lackluster growth. Nonetheless, MMM is now a dead topic and people are back to thinking in the old monetarist framework that was discredited a generation ago because we don't have any other working models of inflation.

[Financial.Velociraptor]

<snip> Nonetheless, MMM is now a dead topic and people are back to thinking in the old monetarist framework that was discredited a generation ago because we don't have any other working models of inflation.

MMT is dead in mainstream media.  Mosler's acolytes continue to print make trading sovereign debt using the new paradigm.  That was the aha! moment for me.  When I learned how much money Mosler made for his investors and himself by sticking to his guns.

[nereo]

I did my undergrad in Econ in the late 90s when the idea of a 2% target was new enough our out of date textbooks still called for 0%.  We had a few lectures that introduced the idea of low but non zero target as being somehow "better".  I was skeptical at the time as I was a pure Friedman style Monetarist at the time.  It has been frightening and fascinating to watch the Fed play with ZIRP, QE/QT, and what I think is a tacit acceptance of some of Mosler's work. 

So, the idea of 2% target was present academically at least as far back as 1997.  We never got particularly deep into it though because the 1998 currency crisis was the hot topic.  Flooding markets with liquidity was considered essential to keep the whole global economy from disintegrating.  That idea came back with a vengeance in 2008 and again for 2020/COVID.   

That’s really a different perspective from what I was taught. Frankly, I find the idea of a zero-inflation environment to be unsettling, and it’s hard for me to imagine a world where that is the target.

[vand]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

You are only looking at the income statement and not at the balance sheet:

huge Federal budget deficit
huge public trade decifit
record Debt/GDP

If your economy grew $10bn but your debt went up by $20bn did you really grow? hmm..

People become blindsided and say that a country doesn't need to pay back its debt.. welll, they may be able to roll it over easier than a household, but I happen to also subscribe to the idea that no entity, individual, state or country, that has an unlimited line of credit with the rest of the world (sure, I know the US is far from unique in this department, which is what makes it all the more fascinating)

The next level down in the analysis is adding back 2% real depreciation of one's $34 trillion national debt. That's like $680B of real debt relief thanks to inflation.

Sure, there's a lot of variance around the optimal mean, but running at 2% gives you more margin for error if things take a turn for the worse than being either side of it

[nereo]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

You are only looking at the income statement and not at the balance sheet:

huge Federal budget deficit
huge public trade decifit
record Debt/GDP

If your economy grew $10bn but your debt went up by $20bn did you really grow? hmm..

People become blindsided and say that a country doesn't need to pay back its debt.. welll, they may be able to roll it over easier than a household, but I happen to also subscribe to the idea that no entity, individual, state or country, that has an unlimited line of credit with the rest of the world (sure, I know the US is far from unique in this department, which is what makes it all the more fascinating)

The next level down in the analysis is adding back 2% real depreciation of one's $34 trillion national debt. That's like $680B of real debt relief thanks to inflation.

Sure, there's a lot of variance around the optimal mean, but running at 2% gives you more margin for error if things take a turn for the worse than being either side of it

Does it really though? What I’ve heard and argued convincingly is that inflation at/near 0% is really bad, and much worse than 4-5%, which is annoying but generally much better.

The real danger is with zero or deflationary numbers relative to 4-5%; ergo a target closer to 2.5-3% makes better policy.

[ChpBstrd]

Who gave them credibility in the first place? The government? The ONLY goal the FED has is to keep creating money. The moment they stop, the house of cards collapses. Period. There is no way to sugar-coat it.

Regarding the last 12 years, yeah Bernanke made a great decision to apply a "made up from thin air" 2% target in 2012 and the only reason he did that is because he was pressured into presenting some form of "target". The two percent inflation goal was a popular trend that began in New Zealand based on literally nothing more than a tongue in cheek comment made 35 years ago.

@nereo would be correct to take the historical viewpoint and go wayyyy the fuck back in history and make a legitimate study based on actual numbers.

The truth of the matter today is that the economy is NOT good, inflation is NOT going to stop anytime soon, and rate cuts are not coming. The FED has one job only and that is to continue creating debt from nothing. They will do whatever they can to keep the market alive and the economy appearing to look manageable but anyone who sees all the data points knows the official narrative regarding the state of the "post-pandemic economy" has been complete bullshit and will continue on that way.

How is the economy "NOT good" exactly? Please provide data to back up this assertion.

My data is: US unemployment at 3.8% (near historical lows). US annualized GDP growth at 3.4%, above average. US corporate earnings at the highest level ever (adjusted for inflation). US non-farm productivity at it's highest level ever. 3rd highest year of US personal income per Capita (inflation adjusted). Highest inflation-adjusted US personal disposable income ever (except for the pandemic money-giveaway year).

This seems like the best the US economy has been doing in a very long time (perhaps ever).

You are only looking at the income statement and not at the balance sheet:

huge Federal budget deficit
huge public trade decifit
record Debt/GDP

If your economy grew $10bn but your debt went up by $20bn did you really grow? hmm..

People become blindsided and say that a country doesn't need to pay back its debt.. welll, they may be able to roll it over easier than a household, but I happen to also subscribe to the idea that no entity, individual, state or country, that has an unlimited line of credit with the rest of the world (sure, I know the US is far from unique in this department, which is what makes it all the more fascinating)

The next level down in the analysis is adding back 2% real depreciation of one's $34 trillion national debt. That's like $680B of real debt relief thanks to inflation.

Sure, there's a lot of variance around the optimal mean, but running at 2% gives you more margin for error if things take a turn for the worse than being either side of it

Does it really though? What I’ve heard and argued convincingly is that inflation at/near 0% is really bad, and much worse than 4-5%, which is annoying but generally much better.

The real danger is with zero or deflationary numbers relative to 4-5%; ergo a target closer to 2.5-3% makes better policy.

That's a fair thought, @nereo. So maybe 2% was picked over the safer 3% because:
a) economists are overconfident in their fine-tuning ability and don't perceive much added benefit from 3%
b) economists are mostly conservative and for ideology and self-interest want to preserve the purchasing power of capital
c) it's more politically acceptable to say we're targeting very low inflation
d) if there is a credibility shortage during inflationary times, and investors think you'll miss your target by 1%, better to have markets expect you'll miss your target and hit 3% than for them to think you'll miss your target and hit 4%.