The Fed’s Inflation Target

The Federal Reserve has announced what appear to be inconsistent policy targets for the upcoming year. The Fed says they want to keep interest rates low at least through 2013, meaning a continuation of easy money policy, and has also announced that their inflation target is 2%.

The inflation rate for 2011 was 3.2%. A continuation of easy money policy through low interest rates should increase inflation, especially if the economy continues to recover. The Fed’s idea that they can both maintain artificially low interest rates and reduce inflation seems inconsistent. I’m expecting inflation in 2012 to be higher than it was in 2011, even though the Fed’s target is lower.