The Federal Reserve predicts its easy monetary policies in part because its preferred inflation rate has been running more than half a percentage point below target for several years.
With inflation so low for such a long time, the thought goes, the Fed can keep interest rates very low for some time to help boost the economy while recovering from the effects of disease. pandemic coronavirus.
This raises an important question: Is the central bank thinking about inflation correctly?
The Fed defines its inflation target in terms of consumer prices, such as the ones we pay for cars, toothpaste and haircuts. But in recent decades, prices have been climbing much faster for investment funds, such as homes and stocks, and have twice led to declining stores and stores.
If the Fed is having problems with the low interest rates that it has helped with engineering, it could be because of asset prices and not consumer prices.