Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank should set an explicit goal for inflation to invigorate the “halting” economic recovery.
“Now is a good time to reaffirm in explicit terms the central bank’s commitment to delivering its piece of the package of fundamentals needed to assure a durable and lasting recovery,” Lockhart said today in prepared remarks for a speech in Charlotte, North Carolina. It was his first call for the adoption of an inflation target.
Fed Chairman Ben S. Bernanke and other Fed officials such as Philadelphia Fed President Charles Plosser and Cleveland’s Sandra Pianalto have advocated adopting an inflation target to more clearly signal their goals to the public. Unlike many central banks that focus primarily on inflation, the Fed has a dual mandate to maintain stable prices and promote maximum employment.
An inflation target wouldn’t significantly alter the conduct of policy since “we have been pursuing policies with an eye toward 2 percent or slightly less headline inflation at least since we began publicly reporting our longer-term inflation forecasts,” he said to the Charlotte Economics Club.
Former Fed Vice Chairman Donald Kohn was skeptical of an inflation target, saying in 2003 that “the U.S. economy has benefited from the flexibility that the Federal Reserve has derived by eschewing a formal inflation target.” In 2007, Kohn led a review of the Fed’s communications strategies that ended with the central bank occasionally publishing its forecasts without an explicit target for an increase in prices.
Lockhart didn’t specify if the Fed should target 2 percent inflation as others have suggested. The target should aim at headline inflation, rather than so-called core measures that exclude food and energy, and “the target must be achievable over a realistic timeframe,” he said.
“That time horizon should be short enough to serve the real interests of the public and short enough to serve as a verifiable check on central bank performance,” he said. “But since monetary policy actions do not have an impact on the economy instantaneously, the time horizon should be long enough for the objective to be realized at an acceptable cost.”
The consumer price index rose 3.2 percent in April from a year earlier, the biggest increase since October 2008. The index excluding food and energy rose 1.3 percent, the most since February 2010. In April, most Fed policy makers expected the current bout of inflation to be “transitory” with overall inflation to decline to 1.2 percent to 2 percent in 2012, according to their economic forecasts.
The Atlanta Fed chief said the central bank must be able to “allow short-run deviations from the targeted rate of headline inflation, and the stated objective should be constructed with this in mind.”
Lockhart said that the time to begin unwinding the Fed’s record monetary stimulus has not yet arrived.
“I am wary of tightening monetary policy in the face of quite ambiguous economic circumstances unless doing so is absolutely necessary to meet the FOMC’s price stability mandate,” Lockhart said. “I’m troubled by what you might describe as a lack of conviction in this economy.”
Lockhart has backed the Federal Open Market Committee’s plans to complete a $600 billion Treasury-securities purchase program this month aimed at boosting the recovery and reducing an unemployment rate stuck at about 9 percent.
Employers added 54,000 jobs in May, the worst performance since September, reinforcing signs that a slowdown in the world’s largest economy is persisting into the second quarter. The unemployment rate rose to 9.1 percent, marking the 26th month of joblessness near 9 percent or higher.
“Recent disappointing incoming data are not a reason to panic,” he said. “In fact, the economy has shown pretty impressive resilience through a litany of what are hardly ordinary and predictable developments.”
Lockhart, 64, a former Georgetown University professor, has led the Atlanta Fed since 2007. Fed presidents rotate voting on monetary policy with Lockhart next voting in 2012.
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