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John Berry: Should the Federal Reserve Set an Explicit Inflation Target?

Perhaps the biggest sign that the Washington Post simply doesn't care about getting the economic policy coverage right is that they never replaced John M. Berry at the Federal Reserve beat.

Here he reviews the state of the internal debate about whether the Fed should communicate with the outside world by announcing its price level and inflation targets. The principal argument against Ben Bernanke's and Rick Mishkin's arguments that it should is that the Fed is headed by people like Ben Bernanke and Rick Mishkin, that we trust them, and that we don't want to tie their hands in the event of some unforseen crisis.

Berry believes that the Fed won't because members of congress would want to see output and employment atrgts alongside the inflation target, and the Fed doesn't believe it knows enough about the structure of the economy to announce those.

John Berry writes for Bloomberg:

June 18 (Bloomberg) -- Federal Reserve officials are still far from agreement on how to improve communications with the public, including whether to adopt a numerical inflation target.

They will spend part of the June 27-28 meeting of the Federal Open Market Committee once again on their long-running effort to resolve their differences, though it seems unlikely they will succeed.

Fed officials hope that better communication of what the central bank is doing and why may make monetary policy more effective.

In a series of speeches this spring, Fed Governor Frederic S. Mishkin laid out a case for setting an inflation target and why doing that might help the central bank meet its legal mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."

No one at the Fed is challenging that mandate.

According to minutes of the March 20-21 FOMC meeting -- the last at which officials had a full discussion of the issue -- participants "emphasized" that setting an inflation target "would need to be consistent with the committee's statutory objectives for promoting maximum employment as well as price stability."

Mishkin argued in an April 10 speech that "a commitment to price stability leads to appropriate policy actions to stabilize employment and output fluctuations." An anchor for prices, such as an inflation target, can help stabilize inflation expectations, which in turn gives a central bank more freedom to respond to the ups and downs of employment and production, he said.

However, the same can't be said for having "a similar sort of anchor for the maximum level of employment," he said.

"Although the Federal Reserve can determine and achieve the long-run average rate of inflation in keeping with its mandate of price stability, the level of maximum sustainable employment is not something that can be chosen by the Federal Reserve because no central bank can control the level of real economic activity or employment over the longer run," Mishkin said.

That argument isn't an easy sell to members of Congress because, even if they may accept it intellectually, they don't want to make themselves vulnerable to criticism that they care more about inflation than they do about their constituents' jobs.