Fed Operating Procedures Discussed at Princeton Conference

Over the weekend, there was a discussion of Fed operating procedures at a conference at Princeton and an indication the Fed is moving towards an official inflation target. As reported by Reuters:

Fed Ponders Best Way to Transparency
Sun Apr 3, 2:23 PM ET

By Andrea Ricci

PRINCETON, N.J (Reuters) - Increased transparency enhances the effectiveness of monetary policy, Federal Reserve officials agree, but they disagree on the nuances of how best to explain the central bank's intentions to financial markets and the general public.

Federal Reserve Bank of Philadelphia President Anthony Santomero told a weekend conference at Princeton University that setting an official inflation target was the "logical next step" in the process of clarifying the Fed's thinking and better managing inflationary expectations.

...That would give the Fed more credibility -- credibility that some investors fear might slip after Alan Greenspan retires in 2006 after many years at the Fed's helm.

...Santomero … said that an inflation target … would not be inconsistent with the Fed's other goal of full employment.

In addition to the movement towards an inflation target, a movement consistent with current theoretical work on optimal monetary policy rules (e.g., see Woodford), there is also a movement towards more transparency generally:

…Alan Blinder, a former vice chairman of the Federal Reserve and now a professor at Princeton University, said the Fed, which has over the last several years provided more and more information about its thinking, should say even more. And it should say it in understandable English, not jargon.

The NY Times reported yesterday that Bernanke is an advocate of an inflation target (this is discussed briefly in a previous post). Thus, Bernanke's views are in step with the direction the bank appears headed, though to be fair there was some oppostion to inflation targets expressed at the conference (see the remarks by Kohn in the Times article).

The consistency of Bernanke's views on the conduct of monetary policy with the direction the Fed appears to be headed is worth noting in the calculation as to whether Bernanke's stint at the CEA is a probationary period prior to his appointment as Fed chair. But this by no means implies that Bernanke will in fact be the administration's choice. There are good arguments against his selection as expressed at New Economist and elsewhere.

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