The Federal Reserve (United States Central Bank) faces a tough decision on its target inflation rate. New reports have surfaced claiming that the Fed’s announced rate will fall below expectations of the target rate.
The Federal Reserve (The Fed) has set its target inflation rate at 2% for the past few years; however, for the most recent four years, this target rate has not aligned with the actual inflation rate. The Fed gets this information based on how the price index in expenditures for personal intake changes every year.
The inflation rate is defined as the rate at which a certain monetary value loses its buying power in the purchase of goods or services. Consider: you are able to buy a candy bar this year for $1. In theory, next year your dollar will not be able to buy that candy bar because the cost of the candy has risen to $1.02, according to the Fed’s target interest rate. Failure to reach the target interest goal has forced the Fed to consider raising the target rate.
Steven Russolillo of the Wall Street Journal states that if the Fed decides to raise their target interest rate, “there would be two consequences... First, the higher inflation rate gives the Fed more power and influence down the road to make cuts to rates. Second, this new rate would bring higher expectations with regards to prices for products in the future.” Many notable figures have come out in favor of raising the 2% target rate including John Williams, chairman of the Fed branch in San Francisco, and Ben Bernanke, the previous Fed Chairman. They believe that an increased target rate would induce higher expectations and a boost to the long-term inflation rate.
With statistics currently showing job growth at a stable pace and household incomes on the upswing, the Fed, according to Russolillo, should be in no rush to change their policy. Unless expectations for inflation rates exceed their current status, economists don't want to disturb the economic progress the country has experienced in recent years.