January 5, 2003	Sunday	Ziqa’ad 1, 1423

WASHINGTON, Jan 4: Federal Reserve Governor Edward Gramlich on Saturday said monetary policy needs an “anchor” or long-term strategy but he stopped short of joining some of his colleagues who have advocated formal inflation targets at the US central bank.

Gramlich told academics at a conference here that a clear strategy would help the Fed react to problems such as a surge in unemployment without unnerving financial markets.

To earn this credibility the Fed should behave in a systematic way, the Fed governor said in remarks prepared for delivery to the Allied Social Science Association. He did not discuss his views about the immediate outlook for the US economy or interest rates.

Gramlich cited different approaches to setting up a strategy that would earn credibility.

One of these was “flexible” inflation targeting and another was the “Taylor Rule,” named for John Taylor, an economist who is now Treasury’s foreign affairs point man and who conceived a method of setting interest rates based on inflation and the output gap.

Inflation targeting is used by many central banks abroad, including the European Central Bank and the Bank of England.

Ben Bernanke, one of the newest members of the Fed’s Board of Governors, is a strong advocate of inflation targeting and wrote a great deal on the subject before joining the Fed.

On Friday, another Fed official, Richmond Fed President Alfred Broaddus, also spoke in strong support of the practice.

Ultimately, high-quality monetary policy ... is too important to be dependent on exceptional leadership alone, which after all cannot be guaranteed over the long pull, Broaddus told a session at the same conference on Friday.

The progress in recent years needs to be institutionalized — locked in — in some manner,” he said, referring to strides made under current Fed Chairman Alan Greenspan and his predecessor Paul Volcker in controlling inflation.

But Greenspan opposes that approach as do some other members of the Fed board. Its opponents maintain that such a system would limit the Fed’s flexibility.

Gramlich said one drawback to using the Taylor Rule as a strategy is that it is based on current inflation and unemployment rates, while inflation targeting looks at forecasts of price movements.

But he said the Taylor Rule approach could be “modified” to factor in forward-looking data.

Gramlich declined to give his view of which approach might make the most sense for the Fed.

Although strategy for policy response may be articulated in different ways, the differences may not be so large in actual practice, the Fed governor said. However the policy strategy is articulated, anchoring it on some concept of long-term price stability is important, as is permitting short-term flexibility to deal with shocks.—Reuters