The Absurdity of the 2% Inflation Target

This is a guest post by Andy Krieger. Andy is a legendary figure in the world of trading, having first made a name for himself in the late 80s when he set the record for being the highest-earning trader on Wall Street. We recently collaborated with Andy on a new project, click here to check it out.

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The Federal Reserve has a dual mandate: to create the conditions for stable prices and maximum employment. However, what is considered “stable” in terms of pricing can be rather subjective. You may be surprised to find out that the quasi-sacred 2% inflation target is arbitrary. It wasn’t born out of rigorous policy research but rather from a random comment by a central bank governor who, quite frankly, wasn’t well-prepared for the role.

In the late 1980s, New Zealand, a country near and dear to my heart (I even named my dog Kiwi), was grappling with substantial price inflation, in the double digits, and sluggish growth, which had caused significant distress among its citizens. For people who’d poured their life savings into government bonds, the impact was devastating. After 20 years of 10% annual inflation, a million New Zealand dollars would only buy what 150,000 could two decades prior. This was hardly helping long-term growth and prosperity.