Inflation Targeting

During the hearing Regarding Ben Bernanke’s Nomination to Be Chairman of the Board of Goverrnors of the Federal Reserve, Sen Sarbanes asked Bernanke why we should pursue inflation targeting when it seems to have failed so miserably in Europe. Bernanke answered in this way

Inflation-targeting comes in many flavors, as some countries have taken a more hawkish stance in terms of putting inflation first among equals or even first among the objectives of policy.As I said, I subscribe entirely to the Humphrey-Hawkins mandate, which puts employment growth and output growth on fully equal footing with inflation in terms of the Federal Reserve’s objectives.

Then the following exchange took place:

SARBANES: E.J. Dionne wrote, just a few weeks ago, “A Fed chairman who beats inflation at the cost of middle-income living standards will not be regarded as a success.”

What do you think about that observation?

BERNANKE: Senator, I think it’s a false dichotomy. I think that middle-income living standards and poverty, for that matter, are best addressed through strong, stable employment growth.

It’s low-income people who suffer most from recessions. It’s low-income people who suffer most from high levels of inflation.

The understanding that central banks currently have is that, by maintaining inflation at a low and stable level, avoiding a situation where inflation gets out of control — as it did, for example, in the 1970s — you can create more stable, more polished (ph), more substantial growth in employment.

I’m entirely in favor of maximum employment. I believe this is a method to achieve it. If I did not think it was, I would not pursue it

Now today, according to Bloomberg, Bernanke said

…stable prices are a “prerequisite” to achieving high employment and moderate interest rates.
Stable prices are desirable in themselves and thus are an important goal of monetary policy…

It appears he hasn’t given up on inflation targeting. My question for Bernanke, how long can you keep the CPI from giving us the truth about inflation, buy bonds on the long end to keep bond holders happy and trade currencies like the Euro and Yen (Richmond Fed President Jeffrey Lacker dissented from FOMC votes to authorize the New York Fed’s trading of foreign currencies, including the euro and yen)? You have already lost control of the gold market, which is signaling something is wrong monetarily.

Sarbanes Bernanke economy

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