miércoles, 18 de febrero de 2009

Inflation targeting by the FED

Fed Chairman Ben Bernanke spoke today: Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet. Bernanke made a comment that could be interpreted as inflation targeting:
Later today, with the release of the minutes of the most recent FOMC meeting, we will be making an additional significant enhancement in Federal Reserve communications: To supplement the current economic projections by governors and Reserve Bank presidents for the next three years, we will also publish their projections of the longer-term values (at a horizon of, for example, five to six years) of output growth, unemployment, and inflation, under the assumptions of appropriate monetary policy and the absence of new shocks to the economy. …

And here is the "inflation target"
from the Fed:
· 1.7 to 2.0 percent inflation, as measured by the price index for personal consumption expenditures (PCE).Most participants judged that a longer-run PCE inflation rate of 2 percent would be consistent with the dual mandate; others indicated that 1-1/2 or 1-3/4 percent inflation would be appropriate.
This seems to move the Fed closer to an official inflation target, and the Fed is probably hoping this will increase inflation expectations (since deflation is the current primary concern).

I want to add the following interesting reference, showing it was an issue long time ago

In his book, A Term at The FED, Chapter 2, Larry Meyer (who by the way was my macro professor at Wash U during my PhD studies) wrote about a discussion between Janet Yellen and Greenspan during his first FOMC meeting (July 2 and 3, 1996), about what level of inflation should the FOMC shoot for, and why?.Greenspan was arguing in favor of a zero target, if inflation is properly measured while Yellen preferred 2%, imprecisely measured. The Chairman later summarized the discussion: “We have now all agreed on 2 percent”.
“The following morning, the Chairman reminded us of “the highly confidential nature of what we talk about at an FOMC meeting”. He looked at us around the table and said quietly, “The discussion we had yesterday was exceptionally interesting and important. I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate” (page 43)

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