Federal Reserve Shifting to an Inflation Target?

November 14, 2007

Bernanke is making major changes to the Federal Reserve, ones that will probably secure his legacy. According to Bernanke’s speech this morning, the FOMC should “refer to an overall inflation rate when evaluating whether the Committee has met its mandated objectives over the long run. For that reason, the Committee has decided to publish projections for overall inflation as well as core inflation.” Now that his speech is over, we see the US dollar higher because inflation targeting, even if it is inflation targeting lite tends to be a practice of central bank that is normally more hawkish than dovish.

Also in his speech, Bernanke pointed out the importance of considering the ENTIRE inflation rate (and not just the core rate) when determining whether inflation is at a rate consistent with their dual mandate of achieving maximum employment and price stability. This is a significant departure from the Fed’s prior belief that core inflation is the only thing that matters. We have seen the rise in the more volatile food and energy components have a more lasting impact on overall prices and the bottom line is consumers are feeling the pain.

In terms of mechanics, the Fed will be publishing their inflation and growth forecasts quarterly instead of twice a year. These numbers will be updated in January, April, June and October. They will also be publishing 3 year forecasts instead of 2 which is similar to the measures taken by Bank of England and European Central Bank.

Posted in Bank of England, Bernanke, ECB, Federal Reserve, Interest rates, US Dollar