Oil Prices and the Fed Fighting Inflation

Stocks are rebounding this week after getting slammed in April. Much of this volatility may be driven in part by the “Fed fighting inflation” headlines working to achieve its 2% CPI mandate, more so than actual economic data points.

Old school or not, while various central banks have different inflation targets, the 2% figure gained popularity, partly due to its use by the Reserve Bank of New Zealand over three decades ago in the early 1990s. This target was seen as low enough to maintain price stability but high enough to provide some flexibility for monetary policy.

Whether central banks should adjust the target to a higher level like 3% and call it a day, depends on various factors including economic conditions. Considering that over the past few decades we had persistently low inflation, history most likely will eventually repeat over time. Regardless of the Fed’s inflation target, moving to quick to cut rates to the downside could send us back to the 70’s leading to future hikes or a harder landing.

1 Bad News is Good News – US Labor Market  

3 Bad News is Bad News- Oil Prices and the Fed

3 Why Oil is Up and what could happen if Iran escalates

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