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Should We Fear Being Average??

Should We Fear Being Average??

March 20, 2023

M. Night Shyamalan is an Indian-American filmmaker, director, and actor. He is known for making unique films with supernatural plots and surprise endings. His breakthrough film, The Sixth Sense, was the second highest-grossing film of 1999 and earned six Oscar nominations. Other notable films he has created include Unbreakable, Signs, and The Village.

Source: Disney+

You might think that someone who has successfully created movies with scary and supernatural themes might be immune to certain fears that the rest of us deal with in everyday life. However, the filmmaker has been quoted as saying, “My biggest fear in life is to be AVERAGE”.

Unfortunately, our Federal Reserve Bank has no fear of being average. They occasionally change the definition of average inflation and the timeline in which they will reach this average rate of inflation is completely undefined. Let’s start with a little bit of economic history to put this in context.

In 2012, then Fed Chairman Ben Bernanke gave a speech at the annual Federal Reserve global banking symposium in Jackson Hole, Wyoming. At this time, he stated that the Fed’s implicit target for inflation was 2%. He laid this out in a policy blueprint entitled “Statement on Longer-Run Goals and Monetary Policy Strategy”. Many economists had suspected that this was the rate the Fed wanted to keep inflation below. However, it had never been publicly stated

People took this to mean that if the Fed saw inflation rates climbing above 2%, they would quickly take action to keep inflation from getting out of control. For those of us old enough to remember the 1970s and 80s, inflation is like a financial cancer eating away at the purchasing power of consumers.

This inflation policy remained in place until 2020 when the Covid pandemic led current Fed Chair Jerome Powell to announce a major policy shift at the same Fed symposium that August. That symposium was delivered virtually due to the viral outbreak. Chairman Powell stated that the central bank had formally agreed to a policy of “average inflation targeting”.

This meant that inflation would be allowed to run moderately above the Fed’s 2% goal for some time, following periods when it ran below that objective. This change in policy meant that the Fed would be less inclined to hike interest rates when inflation first reaches 2%. Their thought was that averaging 2% inflation through periods both above and below this level would allow more people to retain their jobs, thus helping people at the lower end of the wage spectrum.

How has this worked out? As you can see from the chart below from the news organization Axios, year-over-year inflation, as measured by the personal consumption expenditure index (PCE), the Fed’s preferred measure of inflation, is certainly running well above its 2% target.


How long and how high would inflation be allowed to run above this 2% target is completely unknown and undefined. If we look at the last 10 years, when inflation has largely been below 2%, then we could potentially arrive at our 2% average.

We are sharing this to let you know that we are all unwitting participants in a monetary policy game that most people did not realize they were playing. The Fed initially denied inflation was an issue by stating that it was “temporary or transitory”. Now, the Fed is taking extraordinary measures to try to bring inflation back down toward its average target. We are all paying the price (literally) in the meantime.

Legendary college basketball coach John Wooden, who I personally had the opportunity to hear speak when he was age 96, won more national championships than anybody in the history of the NCAA is quoted as saying…

He used this to motivate his players, who he did not want to be happy with being average. Contrary to this, we would be happy if the Fed could get inflation back to our 2% average and stop inflicting pain on the lives of US consumers in the future. This would help all of us as we continue “Moving Life Forward”.

© 2023 Jesse Hurst

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.