“Hi Mom”: Ben Goes Inflation Targeting


I know. This is a VERY late post. I am going to write a few remarks about something that happened 2 1/2 weeks ago. Old news. Nevertheless, big events deserve a comment even after a while. In the April 27 video above, Federal Reserve chairman Ben Bernanke is seen in a press conference following the FOMC’s decision to keep the Fed funds rate unchanged within its 0-0.25% zone. What makes this of significance is that it, as I see it, marks the moment where the United States officially enters the group of inflation-targeting countries.

He explicitly mentions two percent (or a “bit less”) as the average inflation rate consistent with the mandates of the Fed. An announcement of a numerical goal variable is the main defining aspect of any inflation-targeting bank. The particular value was also labeled as “mandate consistent” by Bernanke back in October 2010, so by this confirmation it appears official. Also, by the Fed’s other mandate of securing maximum employment, it is clear that the United States is a flexible inflation targeter. This is evident by the policy decision, where the continued expansive monetary policy reflects that a too high unemployment rate takes precedence over the fact that inflation is currently above two percent (in part due to temporary hikes in energy prices outside of the Fed’s control).

Another key feature of an inflation-targeting central bank is a high degree of transparency and openness about policy deliberations and intentions, which is often aided by press conferences exactly as the one above. The first of its kind in Fed history. So while the Federal Reserve may not label itself an inflation targeting central bank (that could possibly be infeasible for political or legal reasons), it has surely become one, as it fulfills the main criteria laid out in the 1999 book “Inflation targeting: lessons from the international experience” by Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin and Adam S. Posen (Princeton University Press). By the way, in the first paragraph of the preface of this book it says:

“. . . the United States has lagged behind other industrial countries in considering monetary-policy frameworks and institutions that might help ensure good economic performance in the long term.”

12 years later, it seems that Ben finally managed to make his writing antiquated.

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