Since joining the Federal Reserve’s board of governors in 2002, Ben Bernanke has stirred up the central bank by campaigning for more transparency and the adoption of an explicit inflation target. Now his efforts are beginning to pay off.
The Federal Open Market Committee debated setting such a target at its early February meeting, according to minutes released last month. Also last month, the board and presidents of the regional Federal Reserve banks published their two-year inflation forecast, breaking with the tradition of looking only one year ahead. The forecast, which predicted that the core personal consumption expenditures price index would remain steady, increasing 1.5 to 1.75 percent this year and next, could help reassure markets about the Fed’s determination to control inflation.
More than 20 countries, ranging from the U.K. to Brazil, set inflation targets to make their monetary policies more credible and predictable. By joining the club, reasons former Princeton economist Bernanke, the Fed would cement its hard-earned anti-inflation credentials at a crucial time, as it prepares for the scheduled retirement of longtime chairman Alan Greenspan next year. Greenspan has argued that inflation-targeting would restrict the Fed’s flexibility to respond to economic changes and is thought to remain a firm opponent, as are vice chairman Roger Ferguson and governor Donald Kohn. Foes also worry that a target might conflict with the Fed’s dual mandate to maintain both low inflation and strong employment.
Bernanke gained one new convert in last month’s debate: Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, Virginia, who backed targeting in a speech early this month. But 13 of the 19 FOMC members still oppose it.
“Whether the Fed eventually adopts inflation-targeting or not,” Bernanke tells Institutional Investor, “I feel I have contributed something by stimulating debate.”
