The Federal Reserve’s 2% inflation target

Another bullshit idea that won’t go away

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The Federal Reserve asserts that 2% inflation is economic Nirvana.  The Fed believes 2% percent inflation over the “long term” will create optimal conditions for employment and economic growth.  Evidence that 2% inflation is indeed a key component of sustainable prosperity?  None is offered by the geniuses at the Fed.

According to the Federal Reserve website, “The Federal Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates.”  (2% inflation is stable prices?  Talk about fuzzy math!)  The FOMC has the power to buy Treasury securities and other assets with its unlimited checking account to inject liquidity into the financial system to achieve its objectives.  And when inflation accelerates, the FOMC can sell some of the assets the Fed holds to drain liquidity from the economy to dampen inflation.

The Federal Reserve is peddling economic snake oil.  In a free market economy, prices in general slowly decline—that is, there is (good) deflation.  Why?  As Murray Rothbard’s pointed out (“Deflation Reconsidered”) at a seminar I co-hosted in December 1975, “…the trend of an unhampered free market economy will usually be a falling price level. In other words, as productivity increases, as capital investment increases, as technology improves, prices will tend to fall, thereby spreading increasing real income to all consumers. Indeed, over the nineteenth century, generally prices fell and money wages remained approxi­mately constant so that real wages kept going up. We can see even now, in many specific cases, the glorious effects of falling prices in those particular situations where productivity and the mass market has zoomed into the picture, permitting falling prices even in the face of our general inflationary trend.”

In other words, the Fed’s 2% inflation target policy is bullshit, because prices should be declining in virtually every sector as the supply of goods and services increases.  Inflation is anti-consumer and anti-worker, all of whom do not get the benefits of a free market economy, where prices are falling, thereby increasing living standards for all. 

I realized this as a youngster when color television was introduced in the marketplace in the mid 1950s.  The cost of color TV was about $1,000 back then, or roughly $11,000 in today’s purchasing power. HD televisions have plunged in price for the past two decades, the power of the free market in action despite the Fed’s easy money policies.   

Bad ideas are sometimes hard “to kill.”  It is time we bury the notion that 2% inflation is a necessary outcome of monetary policy.

Murray Sabrin, PhD, is emeritus professor of finance, Ramapo College of New Jersey. Dr. Sabrin is considered a “public intellectual” for writing about the economy in scholarly and popular publications. His new book, The Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance (Business Expert Press, Oct. 24, 2022), and his other BEP publication, Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide (October 2021), provides decision makers with tools needed to help manage their businesses during the business cycle.  Sabrin's autobiography, From Immigrant to Public Intellectual: An American Story, was published in November, 2022.