It’s All About the Nuance…
Watch out for a shifting focus. Central bankers know the old 2% inflation target is no longer working. Get ready for them to shift that rate higher.
It’s the nuance.
Not so much what they say…
Nor what they don’t say…
But, the flexibility in which they choose the words they use.
As seen in the following report from Bloomberg.
To give the game away in advance, that 2% inflation target is starting to look a little more flexible.
It’s the nuance…
Bloomberg reports:1
‘Federal Reserve Governor Adriana Kugler said the US central bank should keep its focus on bringing inflation back to its 2% target, though with a “balanced approach” that avoids an “undesirable” slowdown in employment growth and economic expansion.
‘“While I believe the focus should remain on continuing to bring inflation to 2%, I support shifting attention to the maximum-employment side of the FOMC’s dual mandate as well,” Kugler said Tuesday in Frankfurt, referring to the rate-setting Federal Open Market Committee.’
Here, the nuance is also a case of trying to have their proverbial cake while eating it at the same time.
But the plan is clear.
As we’ve mentioned, worldwide, central banks and governments need to convince the general public that inflation needs to be higher than 2%.
They’ll do it. It will just take a little time.
After all, they’ve spent the past 30 years instilling in people that 2% and only 2% is the optimal inflation rate.
Now they have to find a way to change that to 3%-plus… without revealing their incompetence.
Eventually, they’ll do it. Folks don’t really think too much about the real causes and effects of inflation. The only time they worry about it (like now) is when they can clearly see prices rising faster than income.
Of course, this isn’t new. It has been the case for most of the past 50 or so years. The difference is that 2% inflation goes largely unnoticed in the short term.
It takes years before people realise. Even then, they do so with a certain amount of nostalgia, rather than anger.
But when prices rise 8–10% in a relatively short time… and then they rise 5% or more for a while longer… well, people notice that.
They remember that a sushi roll was only $2 or $2.50 as recently as two or three years ago… rather than the $4–5 it is today. (Ed note: We confess. Your editor is only an occasional sushi eater, and so we noticed the price difference last week!)
So expect the US Federal Reserve to do as Governor Adrian Kugler states. Expect it to ‘shift attention’ away from the 2% inflation rate, and instead focus on employment.
That shift will create the diversion the Fed (and other central banks) need in order to make it seem as though 3%-plus inflation really isn’t all that important.
Once it feels it has lessened the perceived importance of a 2% inflation target, they’ll raise it.
Simple as that.
Gold is still trading near US$2,700 per troy ounce. Gold is telling us what’s happening. Nobody believes central banks want to reduce inflation.
If the market believed it, the gold price wouldn’t be where it is today.
We look forward to seeing you back here tomorrow.
Kris Sayce
Editor, Crack of Doom
Issue 42 of 10,000
(We believe in the importance of setting goals. And we figure what better way than to set a big goal from the beginning. If all goes to plan, our final issue of Crack of Doom will be sometime in the 2060’s!)
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Craig Torres, ‘Fed’s Kugler Calls for ‘Balanced Approach’ to Future Cuts’, Bloomberg (Web Page, 8 October 2024) <https://www.bloomberg.com/news/articles/2024-10-08/fed-s-kugler-calls-for-balanced-approach-to-future-rate-cuts?srnd=homepage-americas>.