Inflation Targeting - Debate

Debate

The US Federal Reserve's policy setting committee, the FOMC (Federal Open Market Committee) and its members, regularly publicly state a desired target range for inflation (usually 1.7%-2%), but do not have an explicit inflation target. In a historic shift on January 25th 2012 Chairman Ben Bernanke set a 2% target inflation rate which brings the Fed in line with many of the world's other major central banks. This is likely to be seen as a positive step for the Fed as inflation targeting is usually very successful in other countries because of its transparency and predictability to the markets.

However, some counter that an inflation target would give the Fed too little flexibility to stabilise growth and/or employment in the event of an external economic shock. Another criticism is that an explicit target might turn central bankers into what Mervyn King, now Governor of the Bank of England, had in 1997 colorfully termed "inflation nutters" - that is, central bankers who concentrate on the inflation target to the detriment of stable growth, employment and/or exchange rates. King went on to help design the Bank's inflation targeting policy and asserts that the bafoonery has not actually happened, as does Chairman of the U.S. Federal Reserve Ben Bernanke who states that all of today's inflation targeting is of a flexible variety, in theory and practice.

For the moment, the Fed continues without the strict rules of an explicit target. Former Chairman Alan Greenspan, as well as other former FOMC members such as Alan Blinder, typically agreed with its benefits, but were reluctant to accept the loss of freedom involved; Bernanke, however, is a well-known advocate.