Is it time to reevaluate the Fed’s inflation mandate?
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IS IT TIME TO REEVALUATE THE FED’S INFLATION MANDATE?
The Federal Reserve has two mandates - maximum employment and price stability. But Jim Grant, founder of Grant’s Interest Rate Observer, says it may be time to reevaluate the U.S. central bank’s role in trying to manage inflation.
“Everyone in Wall Street and most people, I guess, in Washington certainly have come to assume that the Fed's 2% inflation target is somehow handed down from on high, or at least the validity is self-evident and the necessity ditto,” he said in an interview. But “doesn't that deserve a little bit more examination than what it’s received?”
Grant cited opinion polls that showed that most Americans want prices to come down.
“What people want is lower prices, everyday low prices…. I wonder why the Fed persists in this unexamined premise that what we need is a 2% rate of rise in the cost of living every year,” he said.
Grant says he would welcome a reexamination of the Fed’s dual mandate by the Trump administration, were it to occur. “I don’t think the Fed ought to be targeting a price level at all,” he said. “Something is fundamentally wrong with fiddling with the value of the dollar.”
“Let's hear about alternative ideas and assess them on their merits. Perhaps in the case of the Fed, such a question might be asked with respect to the dual mandate and to the termination of the Fed to depreciate the currency in which people are paid, in which they save, and to examine the whole thing,” Grant said.
A paper by the Federal Reserve Bank of Richmond earlier this year notes that the U.S. central bank decided on a 2% annual target in 1996, but it didn’t make this public and explicit until 2012.
The Fed was given an inflation mandate by the Federal Reserve Reform Act of 1977, but the Richmond Fed says that price stability was a primary focus for the U.S. central bank even before this.
(Karen Brettell)
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