Inflation target could insulate Fed, Poole says

St. Louis Fed President William Poole said on Thursday 16 October that the Federal Reserve should adopt a target for an acceptable level of inflation in part to insulate itself from political pressures. He was speaking at the start of a two-day conference on inflation targeting at the St Louis Fed.
St. Louis Fed President William Poole said on Thursday 16 October that the Federal Reserve should adopt a target for an acceptable level of inflation in part to insulate itself from political pressures. He was speaking at the start of a two-day conference on inflation targeting at the St Louis Fed.

Source: Reuters

The U.S. central bank should adopt a target for an acceptable level of inflation in part to insulate itself from political pressures, a top Federal Reserve official said on Thursday.

"If we have a lot of pressures from the public at large through the political system ... we want to be able to stiffen the backs of people in the leadership positions of the Federal Reserve," St. Louis Fed President William Poole said at the start of a two-day conference on inflation targeting at his regional Fed bank.

The debate over whether the Fed should join many of the world's major central banks and use a formal and openly stated inflation target to govern monetary policy has gained momentum in recent months. However, Fed Chairman Alan Greenspan has said he prefers a more flexible approach.

Poole argued, as have many other U.S. proponents of inflation targets, that it was important to lock in the gains the Fed has made in taming inflation pressures over the last couple of decades.

To do so, he said, the Fed needs to ensure the public understands the benefits of a low-inflation environment.

"I think the real issue here is the communications with the public. More broadly we're searching for a mechanism that will help to cement the recent ... fine performance of the central bank," he said.

"I think that when public understanding of a policy is weak that gives maximum scope for mischief from the government," he added.

"There are always divided interests. It's not true that low inflation benefits everyone all the time, for example, and particularly in the short run, there may be significant numbers of people who believe that they would be benefited by higher inflation or by relaxed monetary policy," Poole said.

The St. Louis Fed chief has long argued the Fed would be well-served by adopting a specific numerical inflation goal. He has said his preferred target would be zero inflation, taking into account what is generally believed to be upward biases in U.S. inflation indices.

But his Fed colleagues are divided on the issue.

That split will be highlighted at the St. Louis Fed conference on Friday, when Fed Governor Ben Bernanke, a vocal targeting proponent, and Governor Donald Kohn, a critic, appear on a closing panel.

Poole welcomed a consensus that has developed within the economics profession that low and stable inflation brings about the best economic outcomes but warned any targeting regime for the U.S. central bank should be carefully crafted.

"One of the problems obviously in constructing a mechanism that is deeply embedded in this intellectual consensus is that we at the same time have to maintain open minds and a willingness to question ... the consensus," he said.

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