One of the Fed's stated goals is price stability: src: http://www.federalreserve.gov/faqs/money_12848.htm So, how have they been going? Well .... 1790: A consumer basket of goods cost $100 1913: Same consumer basket of goods cost $108 Seems like pretty good price stability to me 1913: Federal Reserve Act creates the Fed 2008: Same consumer basket of goods cost $2,422 Ouch. src: http://www.cato.org/policy-report/novemberdecember-2012/has-fed-been-failure You can listen further here: http://mcalvanyweeklycommentary.com/wp-content/uploads//ica2013-0807.mp3
They don't mean price stability relative to zero, what they mean is a predictable price trend. They target a certain price increase, and when it goes faster or slower, they adjust. The only thing that could be seen as 'special' today is this: they used nearly all their mathematical room to drop interest rates. Negative interest rates would mean that bank depositholders have to pay instead of get interest, and that makes clear their theft way better than a 4% price inflation versus a 3% interest, so they want to avoid negative interest rates. The solution they found to this are excess reserves, by increasing the reserves, with a same interest rate the central bank can pay more dollars. 0.25% on 500 billion dollars excess reserves is 1.25 billion, while that same 0.25% on 1500 billion is 3.75 billion. This way they don't have to increase interest rates and thus avoid that bank depositors receive more intrest.
