If You Can't Hit the Target, Do You Move It Further Away?

Some Fed presidents want higher inflation targets. About 84% of economists think the Fed should stick with a 2% target.

Federal Reserve officials in recent months have floated ways they might alter the central bank’s 2% inflation goal. But economists surveyed by The Wall Street Journal have a message for the Fed: Don’t touch that target.

About 84% of economists said the Fed should stick with its current target, in large part to avoid damaging the central bank’s credibility.

“Changing the rules could trigger skepticism and uncertainty,” said Lynn Reaser, an economist at Point Loma Nazarene University in San Diego.

The Fed adopted the 2% target in 2012. Now, some officials, including former Chairman Ben Bernanke, say the central bank should examine alternatives that would better help the economy recover from recessions in an era of persistently lower inflation and interest rates.

Inflation has undershot the target for all but two months in the past five years.

That suggests officials would have an even harder time hitting their mark if they raised the target or if they sought to let inflation run high for a time to make up for weak inflation periods.

“It’s like moving the goal post when you can’t put the ball in the net,” said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

Just 11% of economists surveyed supported moving to a price-level target and 5% were in favor of raising the inflation target.

Survey Results

  • 84% favor of 2%
  • 11% want price level targets
  • 5% want to raise the target
  • 0% correct answer

Correct Answer

Not one economist came up with the correct answer.

There should not be a target at all because there is no economic benefit to inflation.

By now it should be clear that the inflation target has blown major consecutive bubbles.

Inflation, What Is It?

I define inflation as an increase in money supply and credit with credit marked to market. This is how things work in a "practical" sense, in a fiat-credit driven world.

In places like Zimbabwe or Weimar Germany there was little to no credit relatively speaking. Monetary expansion, not credit, is then the sole determinant.

In most of the modern world, viewing inflation solely in terms of money supply is a mistake. Credit expansion is running rampant, just as it was with the housing bubble in 2006. Thus, by my measure, we are in a state of substantial inflation right now.

As we saw in 2007, all hell breaks loose when banks become capital impaired and people do things like "walk away" from mortgages.

Some use the term "debt deflation" for such events. Banks cannot lend when they become credit impaired. Economic expansion stops, and asset prices plunge even though overall prices as measured by the Fed's preferred measure decline only a small bit.

Bubbles Everywhere

As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.

No Economic Benefit to Inflation

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

​CPI or PCE deflation is not to be feared.

More precisely, price deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.

​It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

​Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

Debt Deflation Coming Up

Another debt-deflation bubble bursting episode is coming up.

All it takes is an economic slowdown or a change in attitudes of greater fools willing to chase the market higher and higher.

Currency Crisis, Debt Deflation on Deck

Another round of debt deflation. a currency crisis, or both is in the cards. Timing is the only issue. It's far too late to believe anything reasonable can be done about the mess the Fed has created.

Buy Gold

Do yourself a favor, buy gold. It's a strong favorite to soar when faith in central banks comes into question.

Final Irony

We are close to the end of this inflationary cycle just as the average analyst thinks inflation is about to pick up.

It's not necessary for consumer prices to decline by my definition, but it's likely they will.

Mike "Mish" Shedlock

No. 1-12

The "benefit" to inflation is that it allows the Federal government to live beyond its means and wield huge power. If it had to pay its bills and settle its debts in gold, it couldn't do it.


The Fed targets 2% because that's a pretty reliable benchmark (regardless of what they do) If they want to raise the target it is because they sense the benchmark shifting. This is where the Fed is fighting itself, real rates are going lower, and no amount of heavy lifting will change that, the stock market sold off because the Fed is fighting ITSELF.


A target is meaningless. It is like a stopped clock that hits the target twice a day. The FED has spent years trying to hit a 2% arbitrarily measured inflation rate. What happens when they get there? Inflation is not going to magically stop at 2% and stay there on a permanently flat plateau. The FED's target is full employment. Another arbitrarily measured rate. From a recession it may take many years to attain it. By the time it is attained, the economy may be near the next recession.


" "walk away" from mortgages" This, unfortunately, is not possible where I stay. No personal bankruptcies are possible here. That is the reason why some are still suffering from 1990's crash. There are no second chances in Finland so the next crash will be destroying another generation that believed the slogan: "This time it is different!" I can tell you, it isn't. There is a huge asset and housing bubble here in Scandinavia. I predict the crash will begin from Sweden and spread.