JACKSON HOLE, Aug 30: Federal Reserve Chairman Alan Greenspan fired back at critics on Friday, saying flexible policy was better for the complex US economy than rigid rules like inflation targets.

Some critics have argued that such an approach to policy is too undisciplined — judgmental, seemingly discretionary and difficult to explain, Greenspan told the Kansas City Fed’s annual conference, a venue he used last year to defend his handling of the 1990s stock market bubble.

Some advocates of more structured monetary policy, including Fed Governor Ben Bernanke, have said the Fed should adopt policy prescriptions like inflation targets, which many central banks — including the European Central Bank — use to keep prices within set boundaries.

That any approach along these lines would lead to an improvement in economic performance, however, is highly doubtful, Greenspan said.

The Fed chief has long resisted the idea of inflation targeting, believing a less-explicit approach to economic management allows for more flexibility.

His unusually brief address on Friday appeared a defense against those who thought the Fed overreacted to the threat of falling prices, as well as to those who want formal inflation goals at the central bank.

Financial markets showed no reaction to his speech, since investors had been hoping for some reference to the recent improvement in the recovery.

Greenspan said the Fed’s technique of considering risks to the outlook had shaped its response this year to the threat of deflation, seen as a remote risk by forecasters.

This spring, several senior policy-makers gave speeches outlining alternative policy tools the Fed could use to combat deflation if it ran out of interest-rate ammunition.

This convinced markets the central bank was mulling such actions as buying bonds and prompted a plunge in long-term interest rates. However, the Fed later made clear that such options were unlikely, triggering a sharp reversal in the bond market and pushing up borrowing costs.

Greenspan said on Friday the tactic of dealing with risks preemptively had inclined Federal Reserve policy-makers toward policies that limit the risk of deflation even though the baseline forecasts from most conventional models would not project such an event.

Later on Friday, he tackled researchers who said lower business cycle volatility in the past two decades was caused by to good luck rather than good policy. A paper from National Bureau of Economic Research economists contended moderation in booms and busts was due more to an absence of big blows like the oil shocks of the 1970s.

Since taking the Fed helm in 1987, Greenspan has built a reputation for using finesse rather than formal dictates to govern monetary policy.

This served him well during the 1990s boom. As the jobless rate tumbled, forecasters started to expect an inflation surge but the Fed chief held off raising rates, believing a new economic force — productivity growth — was at work.

In addition, the Fed chief has been parrying criticism since the stock market collapsed, with some newspaper columnists verging on the vitriolic.

Greenspan used the Jackson Hole event last year for a lengthy defense of his handling of the 1990s stock market bubble and subsequent bust.—Reuters