The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Tuesday, October 26, 2010

The Fed must adopt an inflation target

Frederic Mishkin argues in the FT today that the Fed must adopt an inflation target. This is interesting, since the Fed shares, somewhat uniquely with the RBA, a so-called "dual mandate" even though the RBA has effectively discarded its second objective of maximising employment on the basis that it can achieve this derivatively by concentrating exclusively on price stability. If the Fed did establish a numerical inflation target like the RBA's current 2-3% band, it would be following in our central bank's footsteps. This would not be the first time. The RBA has arguably led the way on thinking in regard to asset prices, too. More from Mishkin:

"Ben Bernanke, the Federal Reserve chairman, discussed his institution’s inflation mandate in a recent speech, leading to speculation a numerical inflation target is under consideration inside America’s central bank. And if there ever was a time to establish such a transparent and credible commitment to a specific target, it is now.

The Fed has a dual mandate, to achieve price stability and maximum sustainable employment. But at the moment it is missing both objectives. Inflation is well below 2 per cent. A sluggish economy means unemployment is likely only to decline slowly from its current level of about 10 per cent. This combination of economic slack and low inflation raises the possibility that inflation expectations will drift downwards...

By establishing an inflation objective at this juncture the Fed can guard against both of these problems. Providing a firm anchor for long-run inflation expectations would make the threat of deflation less likely. But a firm anchor would also give the Fed flexibility to respond to the weakness of the economy – because it would help ensure that any new moves to quantitative easing would not be misinterpreted as signalling a shift in the central bank’s long-run inflation goal, making an upward surge in inflation expectations less likely too."