Friday, January 28, 2011

Will There Be an Explicit Inflation Target in 2011?

Jon Hilsenrath says the Fed is closer to adopting an explicit inflation target. 
Inside the Fed, the idea resurfaced in the fall as the Fed debated the merits of initiating a $600 billion bond-buying program known as quantitative easing. In an Oct. 15 speech in Boston, Mr. Bernanke took another step, saying that Fed officials "generally judge the mandate-consistent inflation rate to be about 2% or a bit below." With inflation running at around 1%, he said there was a case for more Fed easing. An inflation target might be an easier sell when inflation is low; if it were adopted when rates were high, it would be seen as a reason for higher interest rates, which are never popular.

[...]

New challenges this year could put the inflation target back on the agenda. Several Republican lawmakers, concerned that the Fed is stoking inflation, have proposed narrowing the Fed's mandate to price stability, eliminating the employment part.

[...]

The controversial decision to embark on a new round of quantitative easing gave the Fed added reason to adopt a target, Mr. Mishkin says. "In order to make quantitative easing understandable you need to move in this direction of being much clearer about what your long-run inflation objective is and how quantitative easing fits into it," he says. Proponents also say an inflation target goes hand-in-hand with the Fed's employment objective because low inflation supports economic growth and hiring.
I know this is pipe dream, but I wish Fed officials would also consider something like a NGDP level target.  Yes, an inflation target would be easier to adopt because it is easier to understand and sell to the public, but it is ladden with problems as I explain here.  Interestingly, the Fed did talk about a NGDP target in its September, 2010 FOMC meeting.  I actually would prefer an aggregate spending target that stabilized final sales of domestic production rather than NGDP, but I would be happy either way.  Should anyone at the Fed care,  here, here, and here are some of my recent thoughts on it. Also, here is how I would set the trend for a nominal spending level target.

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