WASHINGTON, Jan 4: Richmond Federal Reserve Bank President Alfred Broaddus on Friday said he would like the Federal Reserve to adopt an explicit inflation target to cement the progress it has made in keeping price pressures contained.
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 meeting of the American Finance Association.
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.
The Richmond Fed chief said the Fed’s current monetary policy strategy could be considered implicit inflation targeting but he would like an openly stated and quantitative target, specifically a range from 1 per cent to 2 per cent in the price index for personal consumption spending, excluding volatile food and energy.
Broaddus, a voting member of the Fed’s policy panel under this year’s rotation, said a strong commitment to maintaining low inflation had allowed the Fed to act aggressively to buffer the US economy from unexpected shocks.
His sentiments echoed those of Ben Bernanke, a new member of the Fed board, who before he joined the central bank expressed the same wish for a numerical inflation target to anchor the Fed’s long-term, inflation-fighting credibility.
While many of the world’s central banks have stated inflation levels to guide their monetary policies, Greenspan has resisted adopting one at the Fed.
Broaddus said the US central bank had done well at reining in price pressures.
But the Fed still faces significant policy challenges in the new low-inflation environment, he said, adding that the prospect for deflation — a self-reinforcing spiral of widespread and sustained price declines — had been given little practical attention historically.
He expressed confidence, as have many Fed officials, in the Fed’s ability to deal with deflation successfully, but said the best way to cope with such a threat is not to let it emerge.
There is now broad agreement that the most effective way to deal with deflation is to prevent it from developing in the first place, he said.—Reuters