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Monday, September 18, 2006

Bernanke and Inflation Targeting

Ben Bernanke has never made any secret of the fact that he would like to introduce an inflation targeting procedure down at the Federal Reserve: From this article it would seem that he might benow about to move his agenda forward. As the article also points out this is a rather tricky (not to say delicate) moment. I am not myself convinced of the necessity (or even of the desireability) of inflation targeting per se, but given the level of uncertainty surrounding so many key linchpins in the global and US economies it does seem to me that this is a somewhat more inopportune moment than most. Rich Miller seems to agree.

Federal Reserve Chairman Ben S. Bernanke is stepping up his push for an inflation target at a time when hitting it might damage the U.S. economy.

Bernanke, long a proponent of setting a numerical goal for inflation, has penciled in an in-depth discussion of the Fed's communications strategy, including targets, for next month's Federal Open Market Committee meeting. With targeting enthusiast Frederic Mishkin joining the FOMC, Fed-watchers including former Governor Laurence Meyer say the central bank might agree to shift strategy by mid-2007.

A move toward targeting, perhaps starting with regular publication of inflation reports, would answer criticism that Bernanke's Fed has been blasé about mounting price pressures. The risk is it might also lead central bankers to raise interest rates high enough to push the economy, which they already expect to be weak next year, into a recession.

``You tie your hands a bit,'' says former Fed Vice Chairwoman Alice Rivlin, a senior fellow at the Brookings Institution in Washington. ``You create an expectation that if inflation goes up another notch, you would immediately respond, even if that's not good for the overall economy.''

I agree with Alice Rivlin, right now you need to build in as much flexibility as you can.

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