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Fed Opens Up, but Balks
At Having Inflation Target
November 15, 2007
WASHINGTON -- Federal Reserve Chairman Ben Bernanke is putting his biggest mark yet on the central bank with a set of measures to increase transparency and, in effect, downgrade his own influence to promote the collective view of his Fed colleagues.
The changes, to take effect next week, will provide more frequent forecasts of Fed officials' views on the direction of the economy -- four times a year instead of two -- and extend the forecast horizon to three years from two.
The approach "will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability for the decisions we make," Mr. Bernanke said yesterday at a conference at the Cato Institute.
It is the Fed's most significant step toward transparency since 1994, when the policy-making Federal Open Market Committee started announcing changes to its interest-rate target.
While a tactical achievement for Mr. Bernanke, it falls short of his original goal: an explicit inflation target.
Some Fed officials over the years have balked at the idea of an inflation target -- a publicly stated goal for the inflation rate, which many other central banks use -- because of concerns it would reduce their flexibility to guide the economy.
Some Democratic lawmakers also oppose an approach that could focus more on inflation at the expense of economic growth. While Mr. Bernanke has long disputed that inflation targeting compromised that dual mandate, he recognized it would be hard to persuade Congress of that.
"It bows to the political realities," said Vincent Reinhart, former director of the Fed's division of monetary affairs now at the American Enterprise Institute.
The approach could make Fed officials and the public more comfortable with quantifiable goals. Members' three-year inflation projection is expected to be viewed as an implicit target because that horizon should give them enough time to accomplish their goal.
"It gives them a platform to be more specific about the outlook, and so it can achieve some part of what you want," Mr. Reinhart said. Another economist dubbed it "inflation-targeting lite."
A Fed subcommittee has been studying communications for more than a year, led by Fed Vice Chairman Donald Kohn, a onetime opponent of inflation targeting who recently has indicated less opposition to the idea.
The Fed policy makers -- five governors in Washington and presidents of the dozen regional banks -- discussed potential changes at their regular meetings.
The committee members went through practice runs in their past three meetings, presenting their projections for inflation, real gross domestic product and the unemployment rate.
The committee approved the changes at its October meeting, and the first set of projections will be released Tuesday with minutes from the October meeting.
The figures include both a "core" inflation measure -- which removes volatile food and energy costs -- long seen by Fed officials as a sign of the underlying inflation trend, and overall "headline" inflation.
Fed officials maintain the overall figure is what matters in the long run, and adding it to the forecast is an effort to correct misperceptions they don't care about the food and energy costs that can hit consumers hard.
The emphasis on the committee projections marks another step in the recent depersonalization of the Fed by giving each member the same weight in the forecast. Mr. Bernanke has sought to guide Fed officials toward a consensus -- taking into account the sometimes disparate views of policy makers. Former Fed Chairman Alan Greenspan disliked forecasts, viewing them as unreliable.
Mr. Bernanke acknowledged yesterday that forecasting "is a highly uncertain enterprise," but said the explanations to be released with the forecasts would improve public understanding of the Fed's actions. He also said the committee would invite comments and could make further changes.
Write to Sudeep Reddy at sudeep.reddy@wsj.com
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