Fed chief bets credibility will buy him time in inflation battle
Federal Reserve Chairman Ben S Bernanke, who took office a year ago on February 1, is ready to renew his bet that the Fed’s past success in containing prices buys him time to further reduce inflation.
By Agencies |
WASHINGTON: Federal Reserve Chairman Ben S Bernanke, who took office a year ago on February 1, is ready to renew his bet that the Fed���s past success in containing prices buys him time to further reduce inflation.
Fed officials have been fighting with words instead of deeds, keeping interest rates steady since August even as they warn that price gains are too fast and must come down. The strategy will reward bondholders and win support from the Democratic-controlled Congress ��� provided consumers and companies restrain their expectations for increases in prices.
���Credibility provides them with a lot of power,��� said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. ���It allows the Fed to be very aggressive when interest-rate cuts are needed and to be more patient when tightening is called for.���
Bernanke and his colleagues will keep their benchmark rate at 5.25% on Wednesday, according to all 119 economists surveyed by Bloomberg. The Fed raised the rate at every meeting for two years through June. Policy makers may reiterate that while inflation risks remain, prices will likely moderate in part because expectations are under control.
Household surveys show signs of rising trust in the Fed���s ability to keep prices low and stable. Bernanke���s strategy wasn���t an option for predecessors Paul Volcker and Alan Greenspan at similar points in their terms. Confidence in the Fed was low following a surge in inflation, which reached almost 15% in 1980. Because the central bank had to raise rates aggressively, the costs to jobs and growth were higher, and political scrutiny intensified.
ADVERTISEMENT
���Back then, expectations moved around a lot and it made it harder to combat inflation,��� said Brian Sack, vice-president at Macroeconomic Advisers in Washington and a former Fed economist. ���Having inflation expectations anchored at a low level provides a better inflation performance.���Policy makers��� patience may be tested if the economy continues to accelerate from a slowdown in 2006 and inflation fails to retreat. Since August, the Fed���s statement has said ���some additional firming��� may be needed. While inflation has been at or above the top of Bernanke���s tolerance range of 1-2% for 32 months, the Fed appears in no hurry to bring it down more quickly.
The Fed���s preferred inflation gauge, which excludes food and energy, rose 2.2% in the year to November. ���They have taken a patient approach,��� said Sack. ���That strategy only works if inflation expectations remain contained.���
The Fed slowed inflation to 2.5% on average in the past decade, from 3.6% the previous 10 years, helping reduce predictions of higher prices.
Increased global competition has helped restrain what businesses and labour expect to get paid for goods and services.
Some policy makers acknowledge the Fed���s strategy has risks. In speeches, officials stress the difference between patiently waiting for price gains to ease and tolerating an elevated inflation rate.
���If inflation rates remain high for a prolonged period of time, people might reasonably believe that inflation has permanently shifted higher,��� Cleveland Fed President Sandra Pianalto said in a January 18 speech in Dayton, Ohio.
���The question is, are we at a point where the Fed risks losing control of expectations?��� said Stephen Cecchetti, a former research director at the New York Fed who teaches economics at Brandeis University in Waltham, Massachusetts. So far, inflation looks stable, he added. ���Without a clear, publicly announced numerical goal, then the only thing people
have to go on is your behaviour,��� said Cecchetti.
Download
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.
Download
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
The Economic Times News App for Quarterly Results, Latest News in ITR, Business, Share Market, Live Sensex News & More.
ADVERTISEMENT
