Do you think a longrun forecast for inflation will help the Federal Reserve control inflation?In February 2009, the Federal Reserve released for the first time a long run forecast for inflation. Do...
In February 2009, the Federal Reserve released for the first time a long run forecast for inflation. Do you think this move will help the Federal Reserve control inflation? Do you think it is equivalent to announcing a formal inflammation target?
There are ways to limit the effects of inflation, just as there are ways to loosen monetary policy. The Fed can do it by raising interest rates, and Congress can do it by raising taxes on the fiscal end. But probably the most important way to avoid rampant inflation is by doing exactly what the Fed has done, which is to set inflation targets, which encourage investors to behave accordingly. Knowing what prices ought to be in the future can become a self-fulfilling prophecy if investors give credibility to the Fed.
In my opinion, you cannot control inflation all that well. And it does seem like a foregone conclusion that there will be inflation in time. This is based on the sheer amount of money that is printed. It seems that all the advanced economies are printing money and commodities have gone through the roof. People are seeing inflation in different parts of the world. Soon it should hit America. So, the Fed says that they have inflation under control and for now this might be true, but the future is uncertain.
What the Fed does or doesn't do either hinders or helps the market, usually contrary to the Fed's intended purpose. As a prior post noted, simply by the amount of printed currency circulating, a certain rate of inflation is guaranteed -- this is classic Keynesian Economics, which promotes and accepts the wide circulation of currency, and its resultant inflation and unemployment. If our currency were backed by a precious commodity, the rate of inflation (or deflation) would be next to nothing.
Inflation is not that much of a problem these days as the Fed seems to be more worried about deflation with our economy still relatively weak. However, this would likely help control inflation to some extent because it would remove uncertainty as to what the Fed thinks. If people know what the Fed thinks, they'll know what it is likely to do in terms of interest rates and quantitative easing and such in the future. This gives more certainty, which is likely to decrease worries about inflation.
That forecast is as accurate as weather or climate change models; it is entirely hypothetical based on current factors. Anything and everything can and will change, and there is no way to truly predict the future, only theorize. The Fed is essentially saying, "Here, look at this graph. It will keep you busy while we work behind the scenes. No, you don't need to know what we're really doing; did you see the graph?"
I find it interesting that they can produce a forecast for inflation. What we need to remember is that any forecast, whether it is for inflation or the weather, is notoriously unreliable and can be very innaccurate. However, assuming for one moment that it is accurate, I think it will help produce long term stability in the economy, as we all will be able to plan accordingly in terms of how to manage inflation.
The Fed under Bernanke seems to be making a real effort to be less secretive. Bernanke, for instance, now holds regular press conferences and takes questions from reporters. The only thing that worries me about this is that if he misspeaks, the markets might panic. I wonder if it wouldn't be better to answer submitted questions in written form so that real thought and reflection can be given to the answers.
I have to agree with litteacher here. The suggestion/prediction made by the Federal Reserve is simply that: a prediction. No one knows for sure what will happen in the future. That being said, the predictions can aid the Federal Reserve as to signs of what is to come so as to curtail impending issues.
I don't think you can predict or control inflation. A certain amount is inevitable. However, it might help some people respond to inflation, and it might reduce the amount of uncertainty in the markets, especially the futures markets.