The FOMC participants have hit the road again. On Saturday, Bloomberg had this story on Governor Don Kohn and Federal Reserve Bank of Philadelphia president Anthony Santomero discussing the pros and cons of inflation targeting.
Alan Greenspan, who has led the Fed since 1987, opposes a setting a numerical goal for inflation, contending it limits flexibility in responding to changing economic conditions. He will retire from the Fed Jan. 31, when his non-renewable term as governor ends. Santomero and Kohn debated the issue at a conference on the future of the Fed held at Princeton University's Center for Economic Policy Studies.
Santomero said inflation targeting would make the Fed more transparent to the public and anchor inflation expectations, helping give the Fed room to stimulate the economy when it's weak. Kohn said inflation targets are too rigid and would prevent the sort of "flexible,'' "risk-management'' approach to monetary policy followed under Greenspan...
``Inflation targeting is an idea whose time has come,'' Santomero said. By telling consumers and investors that the Fed is committed to act to keep inflation within a target range, the Fed would be able to respond to weakness in the economy without causing inflation scares, he said.
Santomero proposed an inflation target range of 1 percent to 3 percent on the personal consumption expenditures index excluding food and energy. The central bank should target the 12- month moving average of the inflation gauge so that it doesn't overreact to short-term fluctuations in the index.
"I am a skeptic,'' said Kohn. "Inflation targeting is not well adapted to the risk-management style of monetary policy'' practiced at the Greenspan Fed, he said...
Five of the 12 regional Fed presidents support inflation targets. The others are Gary Stern of Minneapolis, Janet Yellen of San Francisco, William Poole of St. Louis and Jeffrey Lacker of Richmond. Governor Ben Bernanke, who yesterday was named head of the president's Council of Economic Advisors, also supports an explicit inflation target.
Meanwhile, President Poole made some other news of his own. Also from Bloomberg:
The dollar rose after Federal Reserve Bank of St. Louis President William Poole reinforced speculation policy makers will keep raising interest rates as central banks in Europe and Japan leave them unchanged.
The U.S. currency reached the highest since Feb. 10 against the euro. It's up 1.8 percent versus the 12-nation European currency since the Fed raised its target rate on March 22 and said inflation pressure is building. Market reaction to the statement "made a lot of sense,'' Poole said on April 2 in Princeton, New Jersey. Poole was the second Fed official in three days to cite an increasing worry about U.S. inflation...The European Central Bank has kept its benchmark rate at 2 percent since 2003 to help spur growth and will probably do so again on April 7, according to all 34 economists in a Bloomberg survey. The Bank of Japan has left borrowing costs near zero since 2001.
U.S. 10-year Treasury yields have risen half a percentage point since mid-February, helping support the dollar. The Fed has lifted its target rate seven times since June, to 2.75 percent.
"The dollar can hold onto its gains as long as yields keep moving up and if there are more Fed comments like Poole's talking yields higher,'' said Daniel Katzive, a currency strategist at UBS Securities LLC in Stamford, Connecticut.
UPDATE: New Economist notices the Kohn-Santomero discussion too.