Since January 2012, the Fed is aiming for inflation of 2 percent and above. With the current ongoing pandemic, the market believes that the Fed inflation target isn’t going to be achieved.
The purpose of targeted inflation is to maintain price stability while supporting economic growth and stability within the economy. Since inflation has a direct impact on the economy, it can help with lowering unemployment and national income.
So, how is inflation increased? Generally, inflation is increased when the central bank lowers interest rates, it encourages borrowing. If people have more money in their hands, it will contribute to the economy while slightly increasing inflation.
Generally, when the Fed wants to increase inflation to 2 percent, it follows this route. The central bank lowers the interest rates so that more people can get loans. Although the interest rates are low at the moment, the demand for loans isn’t quite meeting the expectations.
This is directly related to the COVID-19. Because more people’s jobs are at risk than ever, it is seen as not that good of a time to get loans. The current borrowing rate helps us to get an idea of whether or not the Fed is going to reach its target for inflation.
It seems very unlikely that the Fed will reach its inflation target. At the time of writing, the inflation rate swings between 1.4 to 1.5 percent which is still way less than the targeted rate now that we have 2 more months into 2021.