July 28 (Bloomberg) -- Federal Reserve Governor Frederic Mishkin said the central bank should adopt an inflation ``goal'' and extend its forecasts to at least five years to increase public confidence in the outlook for the economy.

``The horizon for the projections on output growth, unemployment and inflation should be lengthened'' to five or more years, Mishkin said in the text of a speech at the Peterson Institute for International Economics in Washington.

Fed Chairman Ben S. Bernanke doubled the number of forecasts by the Federal Open Market Committee and broadened their scope last November to try to better inform the public about the Fed's views on growth, employment and inflation.

``Some room for further improvement still remains,'' Mishkin said. Setting an inflation target ``would produce important benefits in economic performance and democratic accountability.''

Bernanke warned Congress in testimony on July 15 that ``upside risks'' to inflation have worsened amid ``significant downside risks'' to economic growth.

Congress, attempting to calm financial markets, passed legislation last week giving the Treasury Department authority to channel capital to Fannie Mae and Freddie Mac through loans and equity investments. The bill, which would mandate the Federal Housing Administration to insure $300 billion in mortgages, is expected to be signed into law this week by President George W. Bush.

`Perfect Storm'

Mishkin, who only briefly discussed the current economy in his text, said during the question period that the economy has faced ``a perfect storm of shocks'' with rising energy prices and a financial crisis.

``As a policy maker, it doesn't get any worse than this,'' he said. The current crisis makes his proposal ``particularly relevant,'' he said.

``Output growth in recent quarters has fallen below potential and the unemployment rate is, as best as I can judge, above the natural rate,'' Mishkin said. ``Sharp increases in the price of many commodities have driven inflation above rates consistent with price stability.''

Mishkin, who has advocated setting an inflation target for many years, said during the question period that a target should focus on overall price changes rather than a core figure that excludes food and energy prices.

``It should be an inflation rate that actually affects people,'' he said. ``People care a hell of a lot about what they are paying for gas.''

His plan may not have broad support among Fed officials and may fail to pass muster with lawmakers such as House Financial Services Committee Chairman Barney Frank, who has said he's leery of any change that compromises the Fed's dual mandate to foster stable prices and maximum employment, said former Fed monetary-affairs director Vincent Reinhart, who attended the speech.

``The FOMC went to the limits of its confidence in disclosure,'' said Reinhart, now a resident scholar at the American Enterprise Institute in Washington. ``It's striking that they haven't really used the forecast in an aggressive way to explain policy setting. So that probably tells you that there's a limited appetite to do more.''

Mishkin said a recent drop in oil prices has been ``very welcome,'' adding ``energy prices can't keep going up forever.''

As food and energy prices moderate, core inflation and overall inflation measures are likely to converge, he said.

The Fed voted June 25 to keep the benchmark U.S. interest rate at 2 percent, pausing after seven consecutive reductions since September.

Mishkin, 57, resigned in May as a member of the board of governors. He will return to the Graduate School of Business at Columbia University as a professor of economics and resume teaching in the fall. The meeting of the FOMC on Aug. 5 will be his last.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net.

Last Updated: July 28, 2008 15:06 EDT