Fed Nears Adopting Inflation Target as Bernanke Pushes for Transparency
Federal Reserve officials are near an agreement on adopting an inflation target, marking another step in opening the central bank’s policy process to public view as part of Chairman Ben Bernanke’s push for greater accountability and effectiveness.
Hot Feature: New Data Shows Euro Zone on Brink of Recession
In order to increase transparency, Bernanke has introduced regular press conferences, and will publish the central bank’s own forecasts for the benchmark lending rate later this month.
Setting an inflation target is just one half of the Fed’s dual mandate from Congress, the other being to define full employment.
Proponents of adopting an inflation target point out that monetary policy directly effects prices. However, the rate of maximum employment the economy can sustain before wages and prices rise depends upon other variables, such as the infusion of technology into the economy, which boosts productivity.
Columbia University economist Frederic Mishkin said estimates for full employment could, by today’s standards, range from a jobless rate of 4.5 percent to 7 percent. The Labor Department reported on Friday that the national unemployment rate dropped to 8.5 percent in December.
As a professor at Princeton University, Bernanke was a leading advocate of inflation targeting, co-authoring the book “Inflation Targeting: Lessons from the International Experience” with Mishkin, Bank of England Monetary Policy Committee member Adam Posen, and economist Thomas Laubach.
At his nomination hearing in November 2005, Bernanke said a numeric inflation goal would be a step “toward greater transparency.” Bernanke created a subcommittee headed by the Fed Board Vice Chairman Janet Yellen to look at ways to improve Fed communications.
Inflation will likely be expressed in terms of changes to the personal consumption expenditures price index, said James Bullard, president of the Federal Reserve Bank of St. Louis. The index rose 2.5 percent in the 12 months ended in November — above the Fed’s longer-run forecast of 1.7 percent to 2 percent.
The Fed may also decide simply to describe a specific level of inflation that would help it achieve its mandate of full employment rather that establish a specific target.
Mark Gertler, a New York University economist and research co-author with Bernanke, said a numeric inflation target would serve as both a tactical and transparency tool for the committee. He believes policymakers should communicate under what inflation conditions they would start to withdraw their record stimulus. The Fed has kept its key interest rate near zero since December 2008, and last month pledged to keep it there through mid-2013.
“One thing that’s probably worth clarifying is whether the Fed treats the target symmetrically, whether they view 2.5 percent inflation as worse than 1.5 percent inflation,” said Gertler. “As inflation gets to 2 percent, is the Fed going to aggressively tighten? As long as output is low, will they let it creep up?”
While Fed Bank of Chicago President Charles Evans has advocated keeping interest rates low until either unemployment falls below 7 percent or the medium-term inflation outlook rises above 3 percent, Fed Bank of Philadelphia President Charles Plosser has pushed for an inflation objective of 2 percent. Bernanke is hoping to get a consensus.
To contact the reporter on this story: Emily Knapp at firstname.lastname@example.org
To contact the editor responsible for this story: Damien Hoffman at email@example.com