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Friday, October 14, 2005

Lawrence Lindsey: No Need for Inflation Target

Former Fed governor Lawrence Lindsey, director of the White House National Economic Council from 2001 through 2002, is a "viable" candidate to replace Greenspan as Fed chair. Today, he said he does not favor an explicit inflation target because it would be difficult to agree on a target, the target would change, and setting a target would do little to enhance the Fed's credibility. In addition, he makes some interesting comments about a debate within the Fed over which measure of inflation to use should an inflation target be adopted, core inflation or overall inflation, and argues that since monetary policy is partly to blame for high aggregate demand and hence for high energy prices, overall inflation rather than core inflation is the appropriate target. Finally, he believes the announcement of a new chair will come just after the December 13 FOMC meeting:

No need for US price target - ex-Bush aide Lindsey, by Tim Ahmann, Reuters: An inflation target would do little to improve U.S. monetary policy since the Federal Reserve's anti-inflation credentials are solid, former White House economic adviser Lawrence Lindsey said on Thursday. Lindsey, considered a potential candidate to succeed Fed chief Alan Greenspan ..., also said deciding on an appropriate target would be a nettlesome issue, since the inflation measure most important to Fed policy could change with economic circumstances. "It's not clear, assuming you have a reasonable degree of credibility to begin with, that you gain much by saying at the end of 2006 this index will be such and such. I don't see where the gain is," Lindsey told a forum hosted by the American Enterprise Institute, where he is a visiting scholar. Lindsey ... said a debate was under way at the Fed over what an appropriate inflation gauge might be should the central bank decide that stating a goal for desired inflation was desirable. "Where you see the debate is core (inflation) over not core," he said, referring to inflation measures that strip out food and energy prices, largely because they are often viewed as volatile, ... Lindsey ... said stripping out energy prices made sense in the past when thinking about underlying inflation and interest rates, since their volatility usually reflected problems with supply, rather than strong demand. But he said the current situation was different. "What we have now is not a supply shock that's driving energy but a demand shock, which is arguably, at least in part, related to monetary policy," he said. "If that's true, excluding energy from your measure of inflation would probably be a mistake."...

Sources close to the White House have said Lindsey, who was Bush's top economic adviser during the 2000 presidential campaign and a key architect of Bush's tax cuts, is one the candidates who has a shot at taking the Fed's helm when Greenspan departs. ... Lindsey ...  said he thought Bush would wait until after the Fed's Dec. 13 policy-setting meeting to announce a Fed nominee so as not to undercut Greenspan's authority. ... Some analysts think a mid-December announcement would leave little time for Congress to approve a successor before Jan. 31. Lindsey, however, said six weeks would leave ample time for a nominee to be approved. Lindsey also said he thought Bush would move to fill two other vacancies on the Fed's board in concert with his decision on who should replace Greenspan...

My views on this are quoted here by New Economist in his discussion of the The Economist's endorsement of Kohn.  With respect to the two most recently discussed candidates, I favor Kohn over Lindsey. [Update:  See Brad DeLong on Kohn here.]

    Posted by on Friday, October 14, 2005 at 12:08 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (3)


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