Inside Financial Services

The Fed’s Planned Inflation Policy Makes No Sense

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Does Fed Vice Chair Richard Clarida not understand that the primary job of a central bank is to safeguard the currency? He doesn’t seem to. Here’s Clarida last month, talking to Bloomberg:

We’re not going to even begin to think about [raising interest rates], we expect, until we actually get observed inflation—and we measure it on a year-over-year basis, equal to 2%. . . . That’s at least—we could actually keep rates at this level even beyond that. [Emphasis added.]

This is—oh, what’s the word?—insane. If price inflation ever does hit and then exceed the Fed’s target and the Fed then lets it run by staying loose anyway, businesses and consumers will understand exactly what’s going on and will adjust their behavior accordingly in order to stay ahead of the situation. Soon enough, that high rate of inflation being tolerated by the Fed will become self-sustaining, and will accelerate. That’s what happened in the 1960s and 1970s, anyway. It wasn’t pleasant.