Bernanke nears inflation target prize
By Mark Felsenthal, Reuters
January 24, 2012, 1:41 am TWN
WASHINGTON--The U.S. Federal Reserve could take the historic step this week of announcing an explicit target for inflation, a move that would fulfill a multi-year quest of the central bank's chairman, Ben Bernanke.
An inflation target would be the capstone of Bernanke's crusade to improve the Fed's communications, an initiative aimed at making the central bank more effective at controlling growth and inflation. It would, at long last, bring the Fed into line with a policy framework used by most other major central banks.
Bernanke has made clearer communications a hallmark of his leadership, and bit by bit, he has worked to cast light on what for years had been purposefully opaque and secretive deliberations.
He has even given the campaign a personal stamp, contrasting his plainspoken and unaffected persona with that of his predecessor, Alan Greenspan, whose ruminations were notoriously oblique.
While Bernanke has touted a numerical inflation goal as a cornerstone of central bank best practices for years, the idea has become timely because it could help quell nagging doubts that the Fed's unprecedented easy money policies are setting the stage for a nasty bout of inflation.
The U.S. economy strengthened toward the end of last year, with job growth accelerating and the unemployment rate dropping to a near three-year low of 8.5 percent.
But the recovery is not expected to retain the momentum.
By announcing a target, the Fed could smooth the path to another round of bond buying should the recovery falter.
"It's a good idea whose time has come," said Marvin Goodfriend, a professor at the Tepper School of Business at Carnegie Mellon University in Pittsburgh and a former senior Fed policy adviser.
In the eyes of Goodfriend and some policymakers, laying out an agreed inflation goal would squelch the idea that the Fed might allow for a faster pace of price gains as it tries to drive unemployment lower.
It would also put the brakes on any notion that the central bank could resort to quicker inflation to ease debt burdens, as some academic economists have suggested as the needed salve for the painfully slow U.S. recovery.