bernanke pushes inflation target and economy may s

note last paragraphs. UK will not sustain it's growth and once the economy splutters all those 1000's of immigrants will add to the social pressures. imho of course.

bloomberg ..

Bernanke Pushes Inflation Target and Economy May Suffer for It

By Rich Miller

Sept. 18 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is stepping up his push for an inflation target at a time when hitting it might damage the U.S. economy.

Bernanke, long a proponent of setting a numerical goal for inflation, has penciled in an in-depth discussion of the Fed's communications strategy, including targets, for next month's Federal Open Market Committee meeting. With targeting enthusiast Frederic Mishkin joining the FOMC, Fed-watchers including former Governor Laurence Meyer say the central bank might agree to shift strategy by mid-2007.

A move toward targeting, perhaps starting with regular publication of inflation reports, would answer criticism that Bernanke's Fed has been blasé about mounting price pressures. The risk is it might also lead central bankers to raise interest rates high enough to push the economy, which they already expect to be weak next year, into a recession.

``You tie your hands a bit,'' says former Fed Vice Chairwoman Alice Rivlin, a senior fellow at the Brookings Institution in Washington. ``You create an expectation that if inflation goes up another notch, you would immediately respond, even if that's not good for the overall economy.''

Fed officials, who are likely to keep interest rates unchanged for the second straight meeting on Sept. 20, have already begun informally talking about some sort of inflation- targeting regime.

``More and more people are moving in that direction,'' Harvey Rosenblum, Dallas Fed executive vice president, told business economists in Boston Sept. 10. ``The subject is very likely to get discussed in a serious way fairly soon.''

Momentum

Louis Crandall, chief economist at Jersey City, New Jersey- based Wrightson ICAP LLC, says many FOMC members wanted to move to an inflation target even before Bernanke, 52, took over the Fed on Feb. 1. ``It's certainly on the table, and it looks like it has some momentum,'' says Crandall.

A numerical inflation objective at Bernanke's Fed would mark a clear break from his predecessor, Alan Greenspan, who argued that a target would limit the Fed's leeway in managing the economy and, if breached, threaten its credibility.

In a 1999 book written with Mishkin and others, Bernanke, then a Princeton University professor, argued the timing then was ``highly propitious'' for the Fed to alter its strategy because inflation was low and the economy was healthy.

The same can't be said today. The economy is slowing, with Fed economists forecasting sub-par growth over the next year and a half, based on the minutes of the FOMC's Aug. 8 meeting. In a Sept. 12 speech, San Francisco Fed President Janet Yellen saw a risk of the economy doing much worse if drooping house prices prompt consumers to cut spending.

`Not the Time'

``This is not the time for the Fed to give up some flexibility in setting interest rates by adopting an inflation target,'' says Martin Baily, a senior fellow at the Institute for International Economics in Washington.

Baily, chairman of the Council of Economic Advisers during the administration of President Bill Clinton, pegs the chances of a recession or near-recession next year at 40 percent. He defines a near-recession as several quarters of annual growth of 1 percent or less.

At the same time, inflation is at levels that Bernanke calls ``unwelcome'' and is likely to stay there into 2007.

The Fed's favorite measure of inflation -- the personal consumption expenditure price index excluding food and energy -- was up 2.4 percent in July from a year earlier, above the 1 to 2 percent ``comfort zone'' identified by Bernanke and other Fed officials. What's more, Fed policy makers don't expect the index to fall into that comfort zone next year, when they see a rate of 2 to 2 1/4 percent.

Shifting Goal Posts

That's led some to question the Fed's inflation-fighting resolve. In a Sept. 8 report entitled ``The Fed Shifts the Inflation Goal Posts,'' Neal Soss, chief economist at Credit Suisse Group in New York, argued that the Fed effectively accepted inflation above its comfort zone by refraining from raising interest rates last month.

``We read the Bernanke Fed as being more sensitive to small undershoots of growth than to small overshoots of inflation,'' wrote Soss, who was an assistant to former Fed chief Paul Volcker.

The push for a target also comes as Fed officials seem uncertain about how inflation works and are divided over how quickly to bring it down.

At the FOMC's August meeting, Richmond Fed President Jeffrey Lacker opposed the decision to hold interest rates unchanged, taking issue with the majority's view that slowing growth would be sufficient to lower inflation.

St. Louis Fed President William Poole said there was no guarantee that slower growth would ease inflationary pressures.

Models Not Perfect

``Inflation forecasting models have not worked very well in recent years,'' he told the National Association of Business Economics meeting in Boston Sept. 11.

Many at the Fed, including Bernanke, have stressed the importance of inflation expectations. If consumers and companies are convinced that inflation will stay low, they'll act to keep prices stable. Consumers will resist paying more, while businesses will refrain from raising prices to avoid losing sales.

Yet Cleveland Fed President Sandra Pianalto says there's much the central bank doesn't understand about the public's view of inflation.

``When you get right down to it, we really know very little about how people form their inflation expectations,'' she said in a Sept. 8 speech. ``To what extent are expectations based on past inflation experience versus looking into the future?''

Bank of England

Bernanke argues an inflation target would help anchor expectations and thus make the Fed's job easier, pointing to the experience of other countries, particularly Britain.

``Ben and most of us view the Bank of England as the state of the art,'' says Adam Posen, one of Bernanke's co-authors on that 1999 book and a senior fellow at the Institute for International Economics.

Since the U.K. government introduced a target in 1992, Britain's economy has grown consistently, without a single quarter of contraction. Consumer price inflation has averaged 1.8 percent over the period, down from 7.2 percent in 1991.

Britain adopted an inflation target to bolster confidence in its currency after a speculative attack forced sterling out of the European Exchange Rate Mechanism.

In the 1999 book, Bernanke wrote that the Bank of England's move came at an ``auspicious'' time, with the U.K.'s economy beginning to rebound while inflation was heading down. He can only hope for the same scenario in the U.S.

To contact the reporter on this story: Rich Miller in Washington at [email protected]

Last Updated: September 17, 2006 19:06 EDT