The Federal Open Market Committee needs to go further with its enhancement of communications — including projecting for longer terms and determining an inflation target — to better serve the market, according to Fed governor Frederic S. Mishkin.
“The FOMC should lengthen the horizons of its projections, reach a consensus on a specific numerical value for the mandate-consistent inflation rate, and indicate that this consensus value would be modified only for good scientific reasons,” Mishkin said yesterday at the Peterson Institute for International Economics in Washington, D.C., according to prepared text of the remarks released by the Fed. “I have argued that moving in this direction would improve economic outcomes by anchoring inflation expectations more firmly while allowing sufficient flexibility to ensure that monetary policy would continue to be fully consistent with our dual mandate of price stability and maximum employment.”
Empirical evidence, Mishkin said, indicated central banks with explicit inflation goals do not have worse output performances than central banks without such goals. “An explicit inflation goal does not imply that these central banks place more emphasis on stabilizing inflation to the detriment of stabilizing output,” he said.
As for the lengthening of the period for which the Fed makes projections, Mishkin suggested a term of five years “or more.”
“FOMC participants should work toward reaching a consensus on the specific numerical value of the mandate-consistent inflation rate, and this consensus value should be reflected in their longer-run projections for inflation,” Mishkin said. He added that the committee should emphasize that this number would be subject to change only “for sound economic reasons, such as substantial improvements in the measurement of inflation or marked changes in the structure of the economy.
“My proposal is, however, consistent with the dual mandate, because it has the advantage of being less likely to be misinterpreted as a commitment to control inflation within a tight range over short horizons, since it only involves a consensus on the mandate-consistent inflation rate and an agreement not to change it without scientific justification,” he said. “By so doing, this proposal should enhance the ability of monetary policy to stabilize fluctuations in economic activity, and therefore support the dual objectives provided to the Federal Reserve by congressional legislation.”
It was expected to be Mishkin’s last public speech before he leaves next month after almost two years at the Fed and returns to Columbia University.