ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Does the Federal Reserve use inflation targeting? Since 2012, the U.S. Federal Reserve has targeted an inflation rate of 2% as measured by the Personal Consumption Expenditures (PCE) Price Index. Keeping inflation low is one of the Fed’s dual mandate objectives, along with stable and low unemployment levels.

Detailed explanation-2: -It took until 2012 for the U.S. to declare its 2% inflation rate target. And since then, there has been controversy over whether that target is justified.

Detailed explanation-3: -When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.

Detailed explanation-4: -The “Statement on Longer-Run Goals and Monetary Policy Strategy"10 was revised, stating that the Fed would and should target average inflation “over time” and thus aim for higher inflation in the near-term future because inflation over the previous decade had typically remained below 2%.

Detailed explanation-5: -“Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices, ” says Gapen. So why might this cause a recession? In the long run, businesses may respond to consumers purchasing fewer goods and services by reducing production, explains Gapen.