“History will remember Paul Volcker and Jerome Powell as standing on the opposite ends of the inflation canyon, with the former taking desperate actions to try to tamp it down and the latter…to announce an unprecedented effort to crank it back up.” (source)
When I read the statement of Chairman Powell’s presentation this week, it was at first hard to fathom, since I am someone who lived through double-digit inflation and double-digit discount rates 4 decades ago. The more I thought about the Chairman’s talk, it made sense. After all, in simple terms, one of the two charges is 2% average inflation rate. Up until recently, maximum employment has been found, but the inflation rate has been less than 2% for all but two years during the past 12 years.
While a higher inflation rate increases the cost of living, it will also spur along an economy. It’s a balancing act for sure, but also gives our Central Bank more tools in the tool box regarding the corresponding discount rate. The bottom line is that we need a healthy inflation rate. Just look at what has happened in Japan for decades with negative inflation. Combined with this new policy, it seems the feds will leave the discount rate close to where it is now, until the mandates are brought back into balance.
To me, we are fortunate to have a solid Central Bank, no matter which way the wind is blowing or the virus is heading.