Federal Reserve officials are discussing whether to adopt an explicit target for inflation, a strategy long advocated by Chairman Ben S. Bernanke and practiced by central banks from New Zealand to Canada, according to people familiar with the discussions.

The talks coincide with Fed efforts to spur growth and reduce unemployment without fueling higher prices. An inflation target could help quiet critics of record monetary stimulus and anchor public expectations for consumer prices should the Fed in coming months try to spur the recovery by keeping interest rates close to zero for longer.

"My sense is that this may be a done deal, though not one likely to be implemented soon, and perhaps not until economic conditions return to closer to normal," said Laurence Meyer, senior managing director and co-founder of Macroeconomic Advisers LLC and a former Fed governor. "The chairman is obviously for it, and it is hard to find anybody on the FOMC who now is really opposed to it."

Calls by policy makers for an inflation target have grown in recent months, with Fed bank presidents in Atlanta, Richmond, St. Louis, Philadelphia and Cleveland supporting such a move. Atlanta Fed President Dennis Lockhart said on June 7 said it's time "to reaffirm in explicit terms the central bank's commitment to delivering its piece of the package of fundamentals needed to assure a durable and lasting recovery."

Active, Serious

People familiar with the discussions by Fed officials indicate they are active and serious, beyond the theoretical debates on the topic that the Federal Open Market Committee has had for more than a decade. Discussions could end without a decision in favor as they have in the past. Fed spokeswoman Michelle Smith declined to comment.

U.S. central bankers already have an implicit goal, which they publish quarterly in the form of a range of long-run forecasts. The goal isn't a binding commitment, and it can change, creating uncertainty in financial markets that can lead to higher long-term bond yields, said Marvin Goodfriend, a former Richmond Fed policy adviser.

"There is nothing to be gained by leaving the world safe for higher inflation," said Goodfriend, now a professor at Carnegie Mellon University in Pittsburgh, who added that improved credibility would allow the Fed to keep interest rates lower, boosting growth in the long term. "It is beneficial for the Fed to go beyond where it is currently and announce an explicit inflation objective."

David Fuller's view Today, at least 20 central banks have an inflation target. They include the UK, which introduced a target of 1 to 4 percent in 1992, after selling pressure forced the government to leave the European Exchange Rate Mechanism (ERM). The rational for the inflation target was to create transparency, control inflation or at least inflationary expectations, and reduce exchange rate volatility. Since 10th December 2003 the BoE's inflation target has been 2 percent.


The Governor of the Bank of England must write a letter to the Chancellor of the Exchequer if inflation moves by more than 1 percentage point above or below the target, explaining why and what he intends to do about it. He has had to write plenty of letters in the last two years because UK CPI inflation remains stubbornly high at 4.5% for April.


So why would Ben Bernanke and his US Federal Reserve colleagues let themselves in for something similar when he already provides far more transparency than his predecessor, and an inflation target has neither stabilised sterling nor contained UK inflation?

Mr Bernanke's deflation fighting policies have been controversial, and while steroids in the form of quantitative easing undoubtedly cushioned the worst recession in decades and prevented unemployment from soaring much higher, many commentators and not least Fullermoney have long maintained that he had sown the seeds of future inflation, led by commodity prices.

The Fed Chairman probably feels that an inflation target would help to mitigate inflationary concerns as the economy recovers. However, since opinions remain divided and forecasts of both inflation and deflation are frequently heard, I think the Fed has another reason for actively favouring an inflation target.

The US dollar has probably reached a level where additional weakness would cause more harm in terms of inflationary risks and talk of crisis than it would assist export competitiveness. Many momentum traders are currently short the US dollar. It would make no sense for the Fed to lobby for an inflation target if it secretly wanted an even weaker currency. A firmer greenback would reduce criticism, not least from other countries. A USD rally would bolster confidence in the US economy.