Federal Reserve may be more open under Bernanke

WASHINGTON -- Ben Bernanke may bring more openness to the secretive Federal Reserve by spelling out what the central bank thinks is an acceptable range of inflation. And that could help consumers and investors better understand where interest-rate policy is heading.

While Bernanke sought to assure Wall Street that he would continue Fed chairman Alan Greenspan's policies if confirmed to replace him, this is an area of some disagreement between them. Greenspan believes setting targets reduces the Fed's flexibility.

Central banks in Britain, Australia and other countries have adopted inflation targets. Although the Fed hasn't, members pay close attention to inflation barometers.

Shaping perceptions

Supporters say if the Fed were to adopt a target it would provide Wall Street and Main Street with a clearer picture of where the economy is headed, so investors can adjust their investments accordingly.

Clearer signals from the Fed about inflation, economic conditions and interest rates can help shape public and investor perceptions and assist the Fed in attaining its goals of nurturing a climate where the economy can grow, employment can flourish and inflation is under control, Bernanke has argued.

"An incremental move toward inflation targeting, in the form of the announcement of a long-run inflation objective, might help the Fed communicate better and perhaps improve policy decisions as well, without the costs feared by those concerned about the potential loss of flexibility," Bernanke said in a 2003 speech, when he was a Fed governor.

Bernanke was at the Fed for nearly three years before taking his current job as chairman of the White House's Council of Economic Advisers, where he serves as the president's chief economist.

Bernanke rejected the idea that targeting locks in the Fed in a 2000 piece he co-wrote with other academics that appeared in the Wall Street Journal,

"Inflation targeting does not mandate that the central bank maintain the announced inflation target level at all times, come hell, high water or severe economic shocks," wrote Bernanke, then a Princeton University economics professor.

He said investor confidence may actually be boosted if the Fed publicly explains why a target was missed and how the central bank plans to get the economy back on track.

A target where "core" inflation -- excluding food and energy prices -- hovers in an annual range of 1 percent to 2 percent might be a reasonable bound, Bernanke has indicated in the past.

Many private economists believe the Fed is operating with an unofficial inflation target in that same range, reflecting the comfort zone of its members.

"Bernanke advocated a loose target scheme, not much different than what many individual members have communicated in recent years. So do not look for a drastic change in the Fed's behavior even if Bernanke were to somehow able to ram through his own preference immediately," said Stephen Stanley, chief economist at RBS Greenwich Capital.

"If anything, Bernanke's inflation-target advocacy points to a broader point: He likes central bank transparency," Stanley said.

Keeping inflation from becoming a danger to the economy remains a critical job for the Fed. Greenspan's predecessor, Paul Volcker, was credited with breaking the back of the stubborn, double-digit inflation that plagued the economy in the late 1970s and early 1980s, by ratcheting up interest rates to levels not seen since the Civil War.

Greenspan has resisted setting targets but has gained the confidence of investors.

"Greenspan always resisted getting hemmed in to taking a stand on any one particular number," said Anil Kashyap, an economics and finance professor at the University of Chicago Graduate School of Business. "I expect Bernanke to convince the rest of the Fed members the benefits of adopting an inflation target. I would guess two or three years from now, Bernanke will have shifted the Fed."

These days, surging energy prices -- made worse by Hurricanes Katrina and Rita -- have fanned worries about an inflation flare-up. Consumer prices soared by 1.2 percent in September, the biggest increase in a quarter-century. The main culprit: a record 12 percent jump in energy prices.

If Bernanke is confirmed by the Senate, one of his first tests as Fed chairman will be whether he can snuff out unwanted inflation without hurting the economy in the process.

Under Greenspan, the Fed has boosted interest rates 11 times, each in modest quarter-point increases, since June 2004 to fend off inflation. Economists expect another rate increase at the Fed's next meeting, Nov. 1, and probably another on Dec. 13.

After that, the Fed's next scheduled meeting is Jan. 31, which would be Greenspan's last. If all goes smoothly for Bernanke he would take over on Feb. 1 and attend his first meeting on March 28.

Like Greenspan, Bernanke prefers a gradual approach to raising or lowering interest rates to influence overall economic activity.

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