Chairman Bernanke and Inflation Targeting
Ben Bernanke, the chairman of the Board of Governors of the Federal Reserve System, is a world renowned expert on monetary policy and, while an academic, wrote extensively on inflation targeting, including articles and a book written with the author of this text.* Bernanke’s writings suggest that he is a strong proponent of inflation targeting and increased transparency in central banks. In an important speech given at a conference at the Federal Reserve Bank of St. Louis in 2004, he described how the Federal Reserve might approach a movement toward inflation targeting: The Fed should announce a numerical value for its long run inflation goal.† Bernanke emphasized that announcing a numerical objective for inflation would be completely consistent with the Fed’s dual mandate of achieving price stability and maximum employment and therefore might be called a mandate consistent inflation objective, because it would be set above zero to avoid deflations, which have harmful effects on employment. In addition, it would not be intended to be a short run target that might lead to excessively tight control of inflation at the expense of overly high employment fluctuations. Since becoming Fed chairman, Bernanke has made it clear that any movement toward inflation targeting must result from a consensus within the FOMC. After Chairman Bernanke set up a subcommittee to discuss Federal Reserve communication, which included discussions about announcing a specific numerical inflation objective, the FOMC made a partial step in the direction of inflation targeting in November of 2007 when it announced a new communication strategy that lengthened the horizon for FOMC participants’ inflation projections to three years, with long run projections for inflation added in 2009. The long run projections under “appropriate policy” will reflect each participant’s inflation objective because at that horizon, inflation would converge to the long run objective. A couple of relatively minor modifications could move the Fed even further toward inflation targeting. The first modification requires lengthening the horizon for the inflation projection. The goal would be to set a time sufficiently far off so that inflation would almost surely converge to its long run value by then. Second, the FOMC participants would need to be willing to reach a consensus on a single value for the mandate consistent inflation objective. With these two modifications, the longer run inflation projections would in effect be an announcement of a specific numerical objective for the inflation rate and so serve as a flexible version of inflation targeting.‡ Whether the Federal Reserve will move in this direction in the future is still highly uncertain.