Inflation: The Fed Solution?

The Federal Reserve Bank policy under Alan Greenspan after the turn of the 21st Century, and under Ben Bernanke today, has always shown some fear of deflation, the kind that engulfed Japan for over the past twenty years. So the Fed always has had an inflation bias.

But why was deflation acceptable in the second half of the 19^th Century when the U. S. operated and expanded under the gold standard? Prices trended down for decades. The financial panics the U. S. experienced were relatively short.

And why must we have 2% or 3% inflation as a norm? That can hurt middle class savings over time? To make it worse, an International Monetary Fund economist has suggested a target inflationary rate of 4%, to make it easier to fight recessions by adjusting interest rates. He deems today’s rates too low to be used as a recession-fighting tool.

But even 2% inflation is a cruel tax.