Fed to announce inflation target; set foundation for qe#

...
What we are left with is a trial-and-error monetary system that depends on the best judgment of 19 men and women who meet every six weeks around a big table at the Federal Reserve in Washington. At the end of a day and a half of discussions, 11 of them vote on what to do next. The error the members of the FOMC fear most when they vote is deflation. So they have built in a 2% margin of error.

Given the crudeness of the tools the FOMC uses to set monetary policy, allowing for such a margin of error is no doubt prudent. For example, when the economy slowed in the first half of last year, inflation picked up, accelerating to a 6.1% annual rate during the second quarter. And when the economic growth accelerated in the second half, inflation slowed. These results are the precise opposite of what the Fed's playbook says are supposed to happen.

The best the Fed can do -- an average debauch in the dollar's value of 2% a year while producing recurring financial crises and a more cyclical economy -- is demonstrably inferior to the results produced by the classical gold standard.

Here's just one example. The largest gold discovery of modern times set off the 1849 California gold rush and increased the supply of gold in the world faster than the increase in the output of goods and services. The price level in the U.S. did increase by 12.4 percent over the next eight years. That translates into an average of just 1.5% a year. The gold standard at its worst was better than the best the Fed now promises to do with the paper dollar.

The Fed's best is hardly good enough. The time has arrived for the American people to demand something far better -- a dollar as good as gold.

Click to expand...

NEW YORK/SAN FRANCISCO (Reuters) - Will the U.S. Federal Reserve look the other way if inflation overruns its target?

Risking the wrath of politicians and the central bank's hard-won reputation for keeping prices stable, three top Fed officials are touting plans for boosting employment that explicitly allow for inflation to run above the Fed's 2.0-percent goal.

Investors are wondering just how high - and for how long - the Fed may allow inflation to rise to encourage borrowing, investment and hiring. In theory, more people working means higher output, which should narrow the gap between what American workers are currently producing and their potential.

"The Fed's body language clearly says they think the output gap is huge and that they're willing to take risks on inflation," said Bluford Putnam, chief economist at futures exchange operator CME Group.

The Fed reduced official interest rates to near zero almost four years ago and has since then bought some $2.3 trillion in securities to boost the economy, taking the central bank deeper into uncharted policy territory.

With the U.S. economy still recovering only slowly, last month the Fed said it would keep buying bonds until the labor market outlook improves "substantially," a move that many investors expect will boost inflation, currently running below the 2.0 percent target.

Since the announcement, the central bank's top policymakers have been busy drawing their lines in the sand.

Minneapolis Fed President Narayana Kocherlakota says he would tolerate inflation of 2.25 percent, and John Williams of the San Francisco Fed says he's OK with 2.5 percent. The Chicago Fed's Charles Evans, considered one of the central bank's most pro-growth "doves," says he'd hold fast to low rates as long as the outlook for inflation stayed below 3 percent.

Volatility in bond markets suggests investors are adjusting their bets as to the true intentions of Fed Chairman Ben Bernanke and his core of policymakers, and whether they will be able to control inflation when the time comes.
...

Click to expand...