There Is Nothing Magical about The Fed's Stated 2% CPI Target
The Fed is trying to inflate the $35 Trillion debt away by allowing CPI to persist in the 3-4% range.
Jerome Powell and his band of merry second-rate, politicized bankers at the Federal Reserve do not possess some cosmic equation that gives them God-like insight into the U.S. and Global economies. For that reason, the Fed should get out of the way. Any attempt to centrally control a market-based economy such as the U.S. economy only creates distortions which do more harm than good.
The reality is that the U.S. economy is no longer a market-based economy. The two variables that have the greatest influence on the U.S. economy are fiscal and monetary policy. The level of Federal Government expenditure combined with the Federal Reserve’s arbitrary setting of interest rates and balance sheet manipulation are the primary drivers of the U.S. economy and the capital markets.
The Fed’s goal ought to be to make itself invisible. Allow the market to set rates. Abandon QE and QT programs. Only moderately flex the money supply when in a deep recession or when prices run hot, which ought not to happen in a free and productive economy. No economy where the Central Government spends $0.62 of every $1 on Social programs is free.
As for today’s CPI print, do not be fooled when the Fed says it wishes to get CPI down to 2%. Why is 2% annual price inflation acceptable? Should not unit prices move downward or remain flattish if private market productivity is increasing? Isn’t that the rule of mass production?
I believe the Fed wants to manage CPI to a range of 3-4%. The reason is because a 3-4% CPI range means higher Nominal GDP. Higher Nominal GDP means higher tax receipts to the Federal Government. As tax receipts increase, the interest payment the U.S. Treasury owes on each outstanding Treasury security remains fixed. This is how a Government inflates its Debt away. For this to work however, the Fed needs to lower its Fed funds rate below the average interest rate on the Debt outstanding, which currently sits at 3.22% and is averaging higher as older securities issued when rates were low mature.