Fed Ignores Gold, Targets Higher Inflation And Plays With Fire

October 22, 2010 05:42

Now the Federal Reserve is considering a price target that would generate higher inflation. In recent communiqués and speeches, the Fed has let it be known that it wants to target an inflation rate of 2%.

Brian S. Wesbury and Robert Stein at Forbes.com


Maintaining a stable value for money is one of the most important tasks a government has. Cost overruns are commonplace during inflationary times. And someone who invests millions to produce a good in one country, expecting to export it to another, can see all his plans ruined when currency values change.

According to the London Financial Times, Chicago Fed President Charles Evans backs a plan in which “the Fed would promise to generate enough extra inflation to make the price level the same as if prices had risen by 2% a year since December 2007, which was the peak of the last business cycle according to the NBER. As soon as the Fed reached that goal, it would abandon the price level target and go back to targeting inflation of about 2% a year.”

The Fed continues to hold interest rates at zero, proposes another round of quantitative easing and plans to target 2% inflation.

That’s what gold is saying. By signaling that it won’t quit anytime soon, the Fed is trying to force banks to change their behavior. If it works, look out for inflation to reach multiples of 2% in the years ahead.


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