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.