Translating the Fed's New Inflation Policy: The Ticker

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By Caroline Baum

One can only squeeze so much into 850 words on a tight deadline. So here are some additional thoughts on the Federal Reserve's ground-breaking announcement yesterday of zero rates in perpetuity that didn't make it into today's column.

It's official (sort of): The Fed now has an explicit inflation target, expressed as a "goal," of 2 percent. That compares with an implicit target of 1.5 percent to 2 percent, as measured by the personal consumption expenditures price index. In other words, the Fed's inflation goal is higher than it was before.

What's more, Bernanke explicitly rejected the idea that the Fed was targeting inflation in the first place. Here's what he said at yesterday's press conference:

"Now, are we inflation targeters? If by 'inflation targeter' you mean a central bank that puts top priority on inflation and other goals like employment as subsidiary goals, then the answer is no. We are a dual-mandate central bank. We put equal weight on price stability and maximum employment. Those are the goals given to us by Congress."

Got it. Next?

It's flexible: After decades of research and real-world experience showing a central bank can only buy more employment in exchange for a little more inflation in the short run, Bernanke said he would be willing to try it.

"We're not absolutists, he said. "If there's a need to let inflation return a little more slowly to target to get a better result on employment, then that's something that we'd be willing to do."

Bernanke isn't trying to create higher inflation, as much as the Treasury could use the help with its soaring debt burden. The risk is what former Richmond Fed research director Marvin Goodfriend calls "inadvertent acquiescence to inflationary risks." With its short-term orientation, the Fed won't act until inflation expectations ratchet up, he says. "And we all know the story after that."

(Caroline Baum is a Bloomberg View columnist.)

-0- Jan/26/2012 17:29 GMT