Chicago Fed President Charles Evans advocates for inflation rates above 2 percent. He believes this approach will bolster the economy and foster full employment. In Evans’ view, increased inflation will drive greater demand, consequently creating more jobs.
According to Evans, the Federal Reserve’s policies should actively promote higher inflation. Later this month, new Fed Chair Janet Yellen will lead her inaugural policy meeting, where we’ll discover if she shares this perspective. Judging by her history, it’s likely she supports inflationary measures. For instance, during a 1995 Federal Open Market Committee meeting, Yellen argued that inflation could be allowed to exceed targets for moral reasons.
“Ms. Yellen conveyed to the committee that ‘the moral’ is ‘that the Fed should pursue multiple goals,’” reported the Economic Policy Journal. “She suggested that ‘when the goals conflict and tough trade-offs arise, a wise and humane policy is occasionally to allow inflation to rise, even when it is above target.’”
For Yellen, adopting wise and compassionate policies equates to fostering job growth, and both she and Evans are willing to accept the trade-off of higher inflation in pursuit of this goal. But how will they implement it?
Former Fed Chair Ben Bernanke demonstratively increased inflation by slashing the federal funds rate to near zero and creating over $3 trillion in new money to purchase Treasuries and mortgages. Despite these aggressive interventions, the economy hardly surged; instead, it continued to struggle along.
Unstable Currency
“Inflation is always and everywhere a monetary phenomenon,” noted Milton Friedman. He likely intended to convey that inflation stems from an increase in the money supply compared to the availability of goods and services. Rising prices result from an inflated monetary base rather than being inflation themselves.
Currently, Yellen is in the process of tapering the Fed’s monthly bond-buying program, gradually decreasing the rate at which the money supply is expanding—an approach initially laid out by Bernanke. However, it remains uncertain whether she will maintain this trajectory or for how long.
What if the recent economic data is indicative of deeper issues and not merely seasonal fluctuations? Will Yellen reconsider the current tapering strategy? Might she devise an entirely new, radical approach to encourage inflation?
Ultimately, the notion that the Fed should seek to increase inflation is fundamentally flawed. Instead, the focus should be on achieving stable currency, not fostering instability. Unfortunately, inflationary policies primarily harm the general population.
Inflation offers little benefit to wage earners and savers; it primarily assists borrowers by lessening their debt burdens and disproportionately benefits the wealthy by inflating asset prices.
How the Fed Works to Spoil Your Retirement
In essence, inflation serves as a covert tax on savers and retirees, diminishing the purchasing power of their savings. Just ask any retiree reliant on a fixed income or a diligent individual saving for retirement.
Inflationary policies are hardly humane or moral; they represent a form of insidious theft. While the Fed aims for a 2 percent annual inflation rate, Evans desires even higher levels.
A 2 percent annual inflation rate can have significant consequences. Over 35 years, it reduces the value of a saved dollar to just 50 cents. For those planning to retire, this reduction makes it increasingly challenging to secure future financial stability. Over a 40-year career, inflation at this rate can halve the initial contributions to retirement savings.
While some years may see the stock market outperform inflation, others may not. Moreover, certain years may inflict significant losses on retirement portfolios due to market crashes.
Once people retire, sustaining their financial resources becomes particularly daunting—especially with the Fed potentially undermining their plans. Mitigating risk and avoiding catastrophic losses complicates the challenge of combating inflation. For many, successfully preserving savings and keeping pace with inflation proves to be a formidable task.
In conclusion, the Fed’s inflationary stance poses a significant threat to retirement security, affecting everyday savers and retirees the most. Addressing these monetary policies is crucial for protecting the financial well-being of future generations.
Sincerely,
MN Gordon
for Economic Prism
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