U.S. Fed Breaks Precedent, Sets 2% Inflation Target

 @MikeObelm.obel@ibtimes.com
on January 25 2012 2:31 PM
  • The U.S. Federal Reserve building is seen in Washington
    The U.S. Federal Reserve building is seen in Washington in this file photo. REUTERS
  • Federal Reserve Chairman Ben Bernanke delivers opening remarks at a conference in Washington
    Federal Reserve Chairman Ben Bernanke delivers opening remarks at a conference on "Small Business and Entrepreneurship during an Economic Recovery" at the Federal Reserve in Washington, November 9, 2011. REUTERS
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(REUTERS) -- The Federal Reserve took the historic step on Wednesday of setting an inflation target, of 2 percent, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world's other major central banks.

The U.S. central bank, in its first ever longer-run goals and policy strategy statement, said it was not appropriate to adopt a fixed goal for employment, however, because the labor market is not largely determined by monetary factors.

The Fed said the 2 percent target - measured by the annual change in the price index for personal consumption expenditures - is the most consistent over the long run with its mandate.

Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the committee's ability to promote maximum employment in the face of significant economic disturbances, the Fed said.

The inflation target caps Bernanke's crusade to improve communications, an initiative aimed at making the central bank more effective at controlling growth and inflation.

Skeptics, particularly among congressional Democrats, have in the past worried that such a target would relegate the Fed's other congressionally set mandate, full employment, to the back burner.

But on Wednesday the Fed said policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision.

The Fed will reaffirm and make adjustments as appropriate to the long-term goals statement each January, it said.

The statement was released simultaneously with another first for the Fed: published charts of individual policymakers' projections for the appropriate path of the benchmark federal funds rate.

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