Saturday, August 16, 2014
The President Of The Minneapolis Federal Reserve Explains Why Low Rate Of Inflation is Bad
The US Federal Reserve has a mission to promote price stability and full employment. Historically, central banks have focused on fighting inflation, which happens when the demand for goods and services exceeds the supply of goods and services that are being produced. Most central banks have an inflation target of 2%. They do a good job of reducing inflation when it exceeds the 2% target. Today we have a different problem. Inflation is below 2% in the US, Japan and much of Europe. The President of the Minneapolis Fed argues that the below target rate of inflation provides a signal that should not be ignored by central banks. It means that there is not sufficient demand for the goods and services that the economy is able to produce. He supports the use of unconventional monetary policy to satisfy the Fed's mission of promoting full employment. Our problem today is price deflation in response to inadequate demand.