Fed Examines New Inflation Targeting

Author: Corey McDowell - Economics Editor

Published: 10 Feb 2020

Last Updated: 2 Feb 2023


The Fed is considering changing the way it measures inflation fundamentally.

Consistently low official inflation levels in the United States has long been irritating bureaucrats in the Federal Reserve. The central bank has been conducting a comprehensive review of its monetary policy strategy and one fundamental change being considered is a new way of targeting inflation. The Fed’s current target rate is 2%, which was brought in as a benchmark in 2012. So far, inflation in the United States has been comfortably below that target level. 

Credit - tradingeconomics.co.uk, US Bureau of Labor Statistics

Whilst the chairman of the Fed, Jerome Powell, was not keen to speculate on any change to the inflation target definition in his last press conference, it has been clear that members of the Federal Open Market Committee (FOMC) have been losing patience with these below-level inflation rates. One radical option the Fed has is to adopt “average inflation targeting” (AIT), which would see the Fed change the target inflation rate so that the average inflation rate would be a specific percentage over time. Some members of the FOMC are reluctant to commit to such a change in policy but a compromise may be reached which would see some form of AIT adopted. 

Why is this development important? The Federal Reserve has a mandate to maintain “price stability”, which it has deemed to be an increase in general price levels of 2% per annum. The United States has gargantuan debt levels which some economic analysts have speculated is close to being unpayable; such to a point that the only way the debt can be shrank is to inflate it away. What happens to gold then? The precious metal has its reputation as a reliable store of value over time, so the value of gold in any fiat currency will generally rise with inflation levels. This is backed up by over 4000 years of history, and any wise investor should have it as part of a well-balanced savings portfolio. Priced in US dollars, gold is currently trading at $1,572.15 per troy ounce, which is already an increase of 3.62% this year.

A transcript of Mr Powell's most recent press conference can be found here.

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