- The Washington Times - Sunday, November 20, 2005

Federal Reserve chairman-designate Ben Bernanke sailed through his Nov. 15 nomination hearing, candidly answering monetary policy and economic questions to the apparent satisfaction of Senate Banking Committee members. The panel approved his nomination the following day.

But what Mr. Bernanke didn’t say directly at the hearing, which can be inferred from his remarks, is as revealing as his explicit statements. For one, his pet inflation targeting policy seems dead, at least for the foreseeable future.

Unlike current Fed Chairman Alan Greenspan, Mr. Bernanke wants the Fed to publish an explicit medium-term numerical goal or target for inflation, which he believes would reduce uncertainty about Fed policy and help stabilize prices. Banking committee members quickly zeroed in, asking if such a policy might constrain Fed flexibility and elevate the Fed’s mandate to control inflation over its twin mandate to promote employment. Mr. Bernanke argued an announced inflation target would not constrain the Fed, though not all committee members seemed convinced, especially Sen. Paul Sarbanes, Maryland Democrat.

Mr. Sarbanes also thought inflation targeting might require new legislation. Mr. Bernanke’s view was that targeting could be done under the Fed’s existing mandate, but if a change in the law were required he would rather not do it.

Mr. Bernanke no doubt knew going in that inflation targeting would be a sensitive issue and he judiciously said there would be no targeting without a “consensus” for it at the Fed.

Consensus means unanimity. Fed policymakers are seven governors and 12 Fed regional bank presidents. Not all support inflation targeting, including Fed Vice Chairman Roger W. Ferguson Jr. and Gov. Donald Kohn. So, it seems Mr. Bernanke’s pet is dead before arrival, which probably doesn’t surprise him.

As Fed chairman, he may try converting the skeptics, but Fed governors serve long terms with independent views rooted in analysis, research and experience. They will not easily be proselytized, and even the all-powerful chairman may not be able to resurrect the dead.

While there are arguments to be made for inflation targeting, it could eventually become a Fed political nightmare. Congress and the Executive Branch would inevitably want a say in setting the inflation target, and achieving consensus would be difficult. Imagine the public confusion and potential disruption to financial markets when, for good economic reasons, the Fed decided to change its target.

Also, congressional demands would certainly arise for an employment target to rebalance the Fed’s twin mandate, and Congress might take it upon itself to pass legislation setting targets, thereby compromising the Fed’s independence.

There are other less risky ways a new chairman could extend Fed transparency, such as publishing more detailed and timely information about the economic forecasts of the Federal Open Market Committee (FOMC), and an earlier release of the minutes and transcripts of FOMC meetings.

At the nomination hearing, Sen. Robert Bennett, Utah Republican, asked Mr. Bernanke about the traditional or unchained Consumer Price Index (CPI), which provides an adjustment peg to Social Security payments, income tax brackets, various welfare and benefit programs, the official poverty line, Treasury inflation-protected securities, wage agreements various other programs. Mr. Bernanke agreed with Mr. Greenspan that the traditional CPI is overstated and that the government’s alternative chain-weighted CPI is more accurate since it reflects consumer buying shifts due to changes in the relative prices of goods and services.

Substituting the more accurate chained price measure in government programs eventually would cut the federal deficit by hundreds of billions. To his credit, Mr. Bennett is pursuing this, and Mr. Bernanke’s view will lend significant weight.

For Fed-watchers looking for clues that Mr. Bernanke believes the federal funds rate is about right or needs further increases, there was some small satisfaction. In reply to a question by Sen. Chris Dodd, the chairman-designate referred to the current rate as “only” 4 percent.

Alfred Tella is former Georgetown University research professor of economics.



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