Volcker Blasts Bernanke and Yellen Over 2% Inflation Target

Volcker openly criticizes his Fed successors over inflation targeting. He is correct yet he did not go far enough.

False Precision

Paul Volcker wrote an op-ed for Bloomberg accusing the Fed of "false precision". On that score, as well as inflation targeting, his criticisms are accurate.

Please consider What’s Wrong With the 2 Percent Inflation Target by Paul Volcker.

In 1996, Federal Reserve Chairman Alan Greenspan had an exchange with Janet Yellen, then a member of the Fed’s Board of Governors, that presaged a major — and, I think, ill-advised — change in the central bank’s approach to managing the economy.

Yellen asked Greenspan: “How do you define price stability?” He gave what I see as the only sensible answer: “That state in which expected changes in the general price level do not effectively alter business or household decisions.” Yellen persisted: “Could you please put a number on that?”

Since then, under the chairmanship of Ben Bernanke and then under Yellen [the answer] has been translated into a number: 2 percent.

I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

I do know some practical facts. No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year.

It is also true, and herein lies the danger, that such seeming numerical precision suggests it is possible to fine-tune policy with more flexible targeting as conditions change. Perhaps an increase to 3 percent to provide a slight stimulus if the economy seems too sluggish? And, if 3 percent isn’t enough, why not 4 percent?

I’m not making this up. I read such ideas voiced occasionally by Fed officials or economists at the International Monetary Fund, and more frequently from economics professors. In Japan, it seems to be the new gospel. I have yet to hear, in the midst of a strong economy, that maybe the inflation target should be reduced!

The fact is, even if it would be desirable, the tools of monetary and fiscal policy simply don’t permit that degree of precision.

Amazing Discussion

Volcker goes on to blast the risks of deflation, noting "fear [of deflation] can in fact, easily lead to policies that inadvertently increase the risk.

Volcker accurately stats that the danger comes from encouraging inflation and its close cousin of extreme speculation creating bubbles and excesses threaten financial markets. Ironically, the “easy money,” striving for a “little inflation” as a means of forestalling deflation, could, in the end, be what brings it about.

Volcker's article is an excerpt from his upcoming book “Keeping At It: The Quest for Sound Money and Good Government,” by Paul Volcker with Christine Harper.)

End the Fed

The only thing Volcker missed is a failure to tackle the notion that there needs to be a central bank at all.

Otherwise, his rant is 100% spot on.

I have commented on this more times than I can count, for at least a decade. Here are a couple examples:

Economic Challenge to Keynesians

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine 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?

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.

How Much is the CPI Understated?

In How Much is the CPI Understated? I made these inflation comments:

Of course, there is no such thing as a representative basket of goods and services in the first place.

Moreover, it makes little sense to average all the components the way the BLS does.

To top it off, the CPI fails to factor in clear bubbles in financial assets. Those financial bubbles are a direct representation of unreported inflation.

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.

Those bubbles will burst bringing about the very deflation the Fed hoped to prevent.

Mish on Inflation Targeting

  1. The Fed's Miserable Inflation Targeting Performance in Pictures
  2. Rethinking the Fed's 2% Inflation Target: Spotlight On an Absurd Debate
  3. Central Banks Rethink 2% Inflation Target (In the Wrong Direction of Course)

The lead image is from number 2 above. Please give it another look.

Bloomberg, the Financial Times, the Wall Street Journal, and the New York Times all turned down articles by me with nearly identical statements as Volcker made.

Mike "Mish" Shedlock

Comments (26)
No. 1-17

"As a direct result of the Fed's total incompetence in understanding inflation"

Add: The Fed's control over interest rates (theoretically they can set it at ZIRP, NIRP or whatever they see fit) and printing press to print money and buy anything they want to the extent they want and mumble some reason or other, some even diametrically opposite depending on what they want to defend at that point of time.

The Fed is nothing more than a bunch of scoundrels out to save banks from bankrupticies, bankers from jail term over the bodies of savers, retirees, prudent people (and soon people who have been forced into taking risks which they most likely would not have due to the demented policies of the Fed). What makes my blood boil is after having destroyed so many people's lives and made price discovery a joke, they were recently preening about having saved the world.

A more fitting action would be rope and lamp-post for these scoundrels.


The point of "2%" is pretty obvious- move the needle off of "price stability" which carries the connotation of "O%". Once you do that, then you can set whatever positive value you want, even if that "target" is one set in hindsight, which of course it would be.


CPI is an over-simplification, at best. Since the middle of the last century, manufactured goods haven't changed much in price, for instance. Sure, some manufactured items have as much as doubled in sale price. But electronics prices provide a heavy counter-balance to such items.

Ted R
Ted R

I wonder how many private jets the Federal Reserves owns these days?

Ted R
Ted R

It is time to finally audit the Federal Reserve.