Plosser Urges Fed to Use Flexible Inflation Targeting

Though it would not end difficult policy choices, an explicit monetary policy framework would improve effectiveness, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said Tuesday, noting that he would take more steps than just flexible inflation targeting.

While the United States has historically used discretion rather than a framework to set monetary policy, steps have been taken “toward the more mainstream approach of flexible inflation targeting,” Plosser told the Union League Club, according to prepared text of his remarks released by the Fed.

“In particular, the Fed, especially under chairman [Ben] Bernanke, has become increasingly transparent and has worked to improve its communications with the public and the markets,” he said. “It has recognized and stressed the importance of keeping inflation expectations well anchored. It has become more transparent regarding the [Federal Open Market] Committee’s economic outlook over both the short and the intermediate term through the publication of its summary of economic projections.”

Even with an explicit monetary policy framework, “a good deal of judgment needs to be used in setting appropriate monetary policy,” Plosser said. Such a plan would improve “effectiveness” and raise “transparency and accountability.”

But the Fed could “further improve and strengthen its approach to policymaking” with several steps — clarifying and setting an explicit inflation objective, providing more information about the expected path of policy, and being more explicit about the committee’s reaction function.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER