What the Fed Wants

It might seem that the Federal Reserve would want consumer inflation, as well as broader inflationary measures, as close to zero as possible. Such is not necessarily the case.

The Fed’s desired inflation target is typically around 1.5-2.0%. Such minimal levels of inflation allow for the needs of a rising population and allow modest price increases, and subsequent wage gains, to occur. As noted in recent days by Federal Reserve Bank of San Francisco President Janet Yellen, it is “not acceptable” for policymakers to allow inflation to fall “to levels that are unhealthy.” (Bloomberg.com)

What the Fed Fears

Aggressive monetary stimulus from the Fed will continue under the new Administration.  Fed Chair Bernanke is fearful that deflationary forces could become more pronounced this year and next. History tells us that dealing with inflation is a problem for consumers and businesses.  However, dealing with deflation is worse…just ask the Japanese.