In my previous post, I provided a summary of views on inflation targeting, compiled by Reuters from the public statements of various Federal Open Market Committee participants. When it came to the thoughts of Federal Reserve Bank of Cleveland president Sandra Pianalto, the Reuters article relied on a speech delivered in Italy on February 21. I think they might have done better to have focused on this, from a speech President Pianalto gave in April:
As you know, the FOMC discussed the pros and cons of establishing an explicit numerical inflation objective at the February meeting. I think that being more explicit about our inflation objective could help us to be successful in maintaining price stability, but my expectations are modest. I do not regard an explicit numerical price objective as a panacea.
We might gain some additional credibility with the public by simply being clearer than we are today and, at the same time, greater clarity might impose some extra self-discipline when we really need it. Let me make my own contribution to the cause. My view is that the rate of inflation should average about 1½ percent, as measured by the Personal Consumption Expenditure price index, over periods of about three to five years.
Inflation is certain to vary in the short run, even when we achieve the objective over time. So putting a range around that long-run objective makes sense to me. My personal tolerance zone is a 1 percentage point spread above and below my 1½ percent inflation objective. I don't view this necessarily as a policy-triggering boundary, but when inflation falls outside that range, I would feel more obligated to explain why I regarded that situation as acceptable.
These are my personal guideposts. I generally support the idea of a Committee objective and range. I say generally because I think it is not particularly useful to offer a blanket endorsement for a proposal that is not yet on the table. Furthermore, I'm sure many of you have been keeping score and know that some of my colleagues are in favor of more formal numerical objectives, but others are not. This does not trouble me, because I do not think it is necessary to jump to formal targeting in one leap. However, I think it would be useful to take a step in that direction.
The FOMC's semi-annual economic projections provide a mechanism for taking that step. As you know, twice a year the FOMC now provides the public with economic projections for the current year and the year ahead. The step I have in mind would have the FOMC provide an additional three- to five-year projection for inflation. This would be based on the participants' working definitions of price stability and policies that support them.
The ranges and central tendencies of these extended projections would be made public, perhaps in an expanded discussion in the Monetary Policy Report. I would not be surprised to discover that the extended three- to five-year inflation projections of the individual FOMC participants converge to a fairly narrow range. This convergence could provide the foundation for a more formal inflation objective at some point in the future.
Taking this step ought to be regarded as a logical extension of our current practice. In fact, I regard it as entirely consistent with the gradual approach the Committee has taken over the years to improve communications with the public.
I'll let you decide what camp that puts her in.