Inflation targeting (IT) is the “next logical step” for the Federal Reserve’s monetary policy. So said Alan Blinder, a Princeton economics professor and former vice chairman of the Fed’s Board of Governors, at a symposium yesterday in New York. A key reason: the arrival of IT supporter Ben Bernanke as Fed chairman, Blinder explained at a discussion of what comes next in monetary policy at an event sponsored by the New York Association for Business Economics. (It was fitting that the assemblage was held at the Manhattan office of the Canadian Consulate, which represents a country that adopted IT in the early 1990s.)
The Greenspan standard is gone, destined for replacement, Blinder continued. What was the Greenspan standard? The iron law that monetary policy should be exactly what Alan Greenspan wanted it to be, he quipped. “The Fed must get off the Greenspan standard, and IT seems the logical next step.”
Another speaker, Laurence Meyer, an economist with Macroeconomic Advisers and a former Fed governor, also found reason to predict that IT is coming to the world’s most influential central bank. His talk, titled “Coming Soon: An Inflation Target for the FOMC,” expounded on the internal Fed debate that Meyer said is slowly evolving toward a policy favoring IT.
Perhaps, but for all the aura of surgical precision that surrounds the idea of a clear and exact inflation objective, the transition from the Greenspan standard promises to be messy just the same. For starters, the use of the term “inflation target” is so yesterday, and arguably carries some political baggage. For cover, IT advocates increasingly reference their favored brand of monetary policy indirectly. At the February 2005 FOMC meeting, for instance, a debate on IT was labeled a “broad-ranging discussion of the pros and cons of formulating a numerical definition of the price-stability objective of monetary policy,” according to Fed minutes.