Inflation Targeting

  

Inflation targeting is when a central bank (the Fed in the U.S.) tells the nation, “hey guys, we’re going to target the crap out of this inflation rate” (basically).

Inflation targeting is a tool in the central bank’s monetary policy utility belt. While inflation targeting is the actual planning and announcing of trying to hit an inflation-rate nationwide, the tool to do this is the same-old, same-old: changes in interest rates.

Yet it’s important to note that the public announcement of inflation targeting is a tool in itself, setting expectations for the public and investors, who can now predict when and by just about how much the Fed will change interest rates. Investors can take advantage of the information, which the Fed knows they’ll do, which investors know that the Fed knows that the...yeah, you get the picture. The never-ending game of monetary policy game theory.

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finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it

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with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]

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also happens to be the acronym for the Federal Open Market Committee and part

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of its purpose in life is to manage financial outcomes through monetary

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policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]

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policy discount rates open market operations and bank reserve requirements

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those are the big three the big three monetary policies used to try and [Monetary policies appear]

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control the economy well the font is responsible for the open market

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operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]

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unemployment and inflation and among other things if unemployment is high

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well in general the FOMC will seek to increase the supply of money by holding

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back on sales of government paper like t-bills bonds notes and all that good

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stuff leaving more cash sloshing around in the [Dollar bills appear]

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marketplace and hopefully encouraging the cost of renting money or interest

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rates to decline like encouraging people to borrow because rates are cheap well

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when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]

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the mall on earrings and rings for other places well it works in the opposite

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direction as well with the FOMC fearing inflation while they'll issue

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lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]

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marketplace and likely causing interest rates to rise right so cash will be less

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available and people want more to rent their precious dollars as interest got

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it okay well the key issue remains that the FOMC is making money more expensive

01:39

when it does that when an issues paper sucking cash out of the system it's hard

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concept for most people including me to understand here

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well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]

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through reams of data and decide what policy should be note that they're

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applying monetary policy here to do their bidding not fiscal policy the gist

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is that the committee is the one sitting atop monetary policy in the US and it's

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the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]

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two and three they can sift through data on the economy jobs inflation bang

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fear surveys etc and then make decisions about what to do or you know what not to

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do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]

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