The Absurdity of the 2% Inflation Target

The Duomo Initiative
6 min readJul 18, 2023

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.

***

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.

Enter Donald Brash, a man with zero experience in macroeconomic policy decision-making. Brash studied economics and earned a master’s degree by writing a thesis on how foreign investment damaged a country’s economic development. He then went on to earn his PhD in economics by writing a dissertation that had exactly the opposite conclusion. It was a perfect hedge, since he was almost certain to be right in one of those papers. To that extent, he may have been well-suited for a career as a central banker. Never take blame and never admit a mistake.

Prior to becoming the governor of the Reserve Bank of New Zealand, he worked at the New Zealand Kiwifruit Authority. Not your typical trajectory for someone destined to make waves in global central banking, but nonetheless, he took the helm in 1988. Brash found himself somewhat out of his depth as the central bank governor. When a reporter asked about his inflation target, he stumbled and suggested a range between 0% and 2%. He later confessed that he’d invented the…

--

--

The Duomo Initiative

We provide the trading development platform that enables you to learn to trade, analyse your performance and apply insights to upgrade your potential.