NEW YORK – The Federal Reserve should formally announce a “commitment to an explicit ‘mandate-consistent’ rate of inflation that it uses as its long run objective for its policy deliberation,” the Shadow Open Market Committee said Tuesday.
Also, the Fed should state a “strategic framework for credibly delivering a low inflation environment,” since Federal Reserve Board Chairman Ben Bernanke said in his April press conference that, “the longer-run outlook for inflation is determined almost entirely by monetary policy.”
The committee also wants to know how the Fed measures “progress towards its inflation mandated target and over what time horizon it wishes to meet this target.”
“It is long overdue for the FOMC to adopt a credible inflation targeting framework,” the committee said I a statement. “The Shadow Open Market Committee continues to recommend that the Fed formally and unilaterally adopt a priority for targeting low inflation as necessary ‘operationally’ to achieve best outcomes for both inflation and unemployment over the longer run. We believe that such a step, while potentially controversial, fulfills the Fed’s obligation to the dual mandate since only by creating a low inflation environment can the Fed create the environment for maximum employment.”
The committee also requested “both a thorough self-assessment as well as welcome an independent assessment of” QE2. The statement said, “a thorough post-evaluation of QE2 will help inform the Fed’s eventual exit from its balance sheet expansion. Similarly, it could also inform a potential further expansion of its balance sheet in any subsequent QE3. Indeed, should the FOMC consider at some point in the future to further increase its balance sheet by purchasing additional government securities, lessons learned, even unpleasant ones, will provide a benchmark for sizing QE3 as well as the wisdom for conducting such operations.”
The group also assailed the possibility of a Treasury default, urging Bernanke “should articulate why a Treasury default should be one of the last options ever undertaken by the US government, and the likely consequences that any deterioration of the status of U.S. Treasuries would have on financial markets, financial firms, and our economic well being.”
Lastly, the committee wants to know how the Fed will handle “the ongoing financial crisis in Europe that stems from the possibility of a sovereign debt default or restructuring by Greece and potentially other countries” and how the Fed will keep the contagion from spreading to the U.S.
