The Fed Has a Problem at the Heart of Its Battle to Spark Inflation

  • There’s a flaw at the heart of central banking’s approach to inflation targeting that’s become a hot issue for the Federal Reserve as it takes a long, hard look at its strategy.
  • For decades, central bankers have pursued price goals while saying financial stability risks are better curbed by regulation.
  • The contradiction is that monetary policy is often the most powerful fuel for asset bubbles as central bankers hold interest rates low to try and lift inflation that remains weak despite solid growth and rising productivity.
  • As central bankers meet Tuesday and Wednesday, they’ll see an economy growing strongly while the core inflation rate slowed to 1.6% last month. That’s well below their 2% goal and continues a persistent undershoot which has prompted a year-long review of the Fed’s price strategy.

(Source: Bloomberg)