One policy option Bernanke wants to avoid

Raising its inflation target

In his long-awaited and closely-followed speech yesterday, Fed Chairman Ben Bernanke discussed how three policy options that could be used to prop up the economy that are still available in the Fed’s arsenal:

1. Purchases of additional longer-term securities
2. Modifying the Fed’s communication
3. Reducing the interest rate the Fed pays on bank reserves.

In each case, he discussed how these might boost the economy and also talked about the drawbacks of each option.

One measure that seems unlikely to be introduced that received some play in Friday’s speech was the idea of “raising medium-term inflation goals above levels consistent with price stability.”

Besides going against the Fed’s dual mandate, which includes price stability, Bernanke said he sees “no support for this option on the FOMC.”

He noted, “Inflation expectations appear reasonably well-anchored, and both inflation expectations and actual inflation remain within a range consistent with price stability….inflation would be higher and probably more volatile under such a policy, undermining confidence and the ability of firms and households to make longer-term plans, while squandering the Fed's hard-won inflation credibility.

“Inflation expectations would also likely become significantly less stable, and risk premiums in asset markets--including inflation risk premiums--would rise. The combination of increased uncertainty for households and businesses, higher risk premiums in financial markets, and the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy.”

Well put.

An overview and analysis of  his remarks are available in my article entitled, Bernanke talks up policy options to ensure growth.