The U.S. Federal Reserve may have more latitude to pursue easy-money policies if inflation runs below its newly-set 2-percent target, though such a move does not guarantee more jobs, a top central bank official said on Thursday.
Dallas Federal Reserve President Richard Fisher, usually a critic of the Fed's aggressive actions to stoke employment, further tempered the comment with a strong endorsement of the Fed's decision last week to formally acknowledge its limited ability to influence the labor market.
In a big step toward transparency, the central bank last week adopted the explicit inflation target. But it declined to likewise set a target for its other main concern, unemployment, arguing that monetary policy has little direct influence on jobs.
To the extent that inflation is running below 2 percent, the Federal Reserve may have somewhat greater latitude to pursue accommodation, Fisher said to a business audience here. However, the past few years have demonstrated, yet again, that allowing inflation to rise by no means guarantees faster job growth.
Some of the 17 current Fed policymakers, including Chairman Ben Bernanke, have said that more large-scale asset purchases may be necessary if unemployment, now at 8.5 percent, remains high and if inflation is subdued, and if the U.S. economic recovery fails to gain traction.
Inflation has slowed over the last couple of months and the Fed expects it to ease this year. Core inflation is now running at about 1.7 percent.
Already the Fed has bought some $2.3 trillion in long-term securities and has kept interest rates near zero for more than three years in an unprecedented attempt to revive the economy after a harsh recession that doubled the jobless rate.
Earlier on Thursday, testifying before Congress, Bernanke was on the defensive against charges from Republican lawmakers that the Fed's easy-money policies and focus on employment risked sparking inflation. The chairman argued the economy still needs plenty of support.
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In what was interpreted as more easy policy, the Fed's policy-setting committee last week also said it expected to keep interest rates exceptionally low at least through late 2014, more than a year later than its previous target date.
Fisher - echoing comments by Charles Plosser of the Philadelphia Fed on Wednesday - criticized the move on grounds that monetary policy should not be tied to a specific date.
Instead, I feel that the key should be to calibrate monetary policy according to the state or condition of the economy, Fisher told the Headliners Club of Austin.
Fisher is among the most hawkish of the Fed's top officials and dissented in decisions of its policy-setting committee last year because he saw the actions as over-accommodative and risking inflation in the future.
He does not have a vote this year but regains one in 2014, when most policymakers expect the first rate rise, according to newly published forecasts by individual Fed officials.
The Fed's new inflation target and the acknowledgement on unemployment effectively puts the ball into Congress' court to take steps to lower unemployment and help the economy, Fisher added.
The Fed, the nation's monetary authority, has clearly articulated its longer-run goal and policy strategy and has conducted itself with integrity by responding to the needs of the economy, he said.
In contrast, the fiscal authorities have conducted themselves with impunity: Their only long-term strategy is to pass the bill to our children and grandchildren.
(Reporting by Jonathan Spicer; Editing by Andrew Hay; editing by Carol Bishopric)