NEW YORK – Hailing explicit inflation targets as “perfectly consistent with the Fed’s dual mandate,” Federal Reserve Bank of St. Louis President James Bullard said Monday by publicizing its target, the Fed can “minimize uncertainty.”
“Much of the discussion about the dual mandate is, in my view, really about the nature of the Fed’s reaction function to economic events,” which is separate from setting an inflation target, Bullard told a group at Utah State University, according to a release from the Fed. In addition, “inflation targeting is consistent with hawks, doves and even bubbles,” he said.
Bullard said that historically, central banks did not say explicitly what rate of inflation they were trying to achieve in the medium to long run, but this practice was called into question after the global inflation debacle during the 1970s. “Since the central bank controls the inflation rate, there seems to be little to be gained from ‘hiding’ the inflation target,” he said, adding that financial markets will “pencil in” their own perception of the inflation target, with some uncertainty about its true value. “That just adds unnecessary uncertainty to the macroeconomic system,” he said.
Bullard discussed a simple economic model, in which the monetary authority controls a short-term nominal interest rate and uses a Taylor-type policy rule to describe the interest rate decisions. He said that in the model, the central bank can move the nominal interest rate to offset incoming shocks exactly, and inflation remains at the target rate and employment remains at the maximum level. Thus, he said, “the dual mandate is achieved exactly at every point in time.” With a single price stability mandate system, Bullard said that the essential story would not change and that “achieving the single mandate is still consistent with the maximum level of employment of households.”
