Wednesday, February 18, 2009

Bernanke and Fed Minutes

by Bill McBride on 2/18/2009 02:06:00 PM

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. These longer-term projections will inform the public of the Committee participants' estimates of the rate of growth of output and the unemployment rate that appear to be sustainable in the long run in the United States, taking into account important influences such as the trend growth rates of productivity and the labor force, improvements in worker education and skills, the efficiency of the labor market at matching workers and jobs, government policies affecting technological development or the labor market, and other factors. The longer-term projections of inflation may be interpreted, in turn, as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by the Congress--that is, the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability.
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).