Inflation is dropping, but is the Fed’s 2% goal realistic?

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The Federal Reserve’s preferred measure of inflation rose 4.4% annually in December, down from 4.7% in November, the latest sign that the era of red-hot prices is coming to an end.

The core personal consumption expenditures (PCE) price index, also known as the core PCE deflator, rose 4.4% on an annual basis in December from 4.7% in November, in line with economists’ expectations.

The so-called headline PCE deflator, which includes food and energy prices, declined to 5% in December from 5.5% in November, further evidence of cooling inflation.

It’s great to see inflation dropping, but it’s doubtful that the Fed, which meets the first week of February, will decline to raise interest rates at least another half-percent, if not three-quarters.

Why will the Fed continue to raise interest rates and inflict additional pain on an already weary purchasing public if inflation is dropping? The answer – 2 percent.

The Fed is stuck on a 2% inflation target rate

Since the 1980s, despite the changes in just about everything, the Fed remains fixated on a 2 percent target rate for consumer inflation. This is coming under scrutiny from economists, lawmakers, and investors who are all expressing doubt about whether two percent is realistic, or even desirable, in the post-pandemic economy.

Economists are concerned that sticking to a target of 2 percent will only cause a worldwide recession and result in the loss of millions of jobs. Politicians, such as Senate Banking Committee member Thom Tillis (R-N.C.), said recently, “I doubt that the Fed alone can get us below four percent.”

Is a three or four-percent inflation rate more realistic than the Fed’s two percent? Why not raise it to three percent, slowly cut interest rates when that target is hit, and see how the economy reacts?

Let your elected representatives know if you agree. Change can only happen if we raise our voices together.

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