NEW YORK – With the economy recovering, the Fed should consider implementing an explicit numerical objective for inflation, Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser said today.
“As the economic outlook improves, we have not only the opportunity but the duty to begin focusing on the longer run and to consider important monetary policy reforms that will lower the chances of experiencing such a severe crisis again,” Plosser said according to text of his remarks, which was released by the Fed. “I believe adopting an explicit numerical inflation objective will enhance the ability of monetary policy to achieve the Federal Reserve’s statutory mandates of price stability, moderate long term interest rates, and maximum employment.”
He added, “The apparent strengthening of the U.S. economy suggests that, in the not-too-distant future, monetary policy will have to begin reversing course from a very accommodative policy stance. As we choreograph that exit, I believe that the Fed should do all it can to underscore its commitment to maintaining price stability.”
While not fearing inflation, Plosser said, he is concerned by the quick change from fears of deflation to inflation. “It suggests that the public’s confidence in the Federal Reserve’s commitment to maintain price stability is not as firmly established as I would like,” he said. “This is problematic for monetary policymakers, since this confidence is essential for a central bank’s ability to actually deliver on the goal of price stability for the economy.”
Economists believe that an inflation target “can help a central bank maintain low and stable inflation by anchoring inflation expectations, enhancing policy transparency, and increasing central bank accountability for its actions,” and more than 20 central banks around the globe has set targets, Plosser said. “A glaring exception to this worldwide trend is the U.S. Federal Reserve.”
