Inflation goal could aid US economy

By Tim Ahmann

WASHINGTON, June 9 (Reuters) - Setting a specific goal for inflation could be a better way of controlling expectations about future price changes and help make the U.S. economy more efficient, Federal Reserve Board Governor Ben Bernanke said.

In an interview posted on the Minneapolis Federal Reserve Bank's Web site earlier this week, Bernanke -- a vocal advocate of targeting inflation -- said that, while the Fed's inflation- fighting credibility is high, the adoption of a numerical goal could still prove helpful.

"Inflation expectations in the United States are better anchored then they used to be, but are still too volatile for optimum performance of the economy," he said.

Bernanke said bond yields movement showed how sharply views about future inflation can shift and he said the premium holders of inflation-protected securities are demanding over other U.S. debt suggested fear of inflation that was higher than desired.

"Inflation compensation in indexed securities is higher (suggesting a large inflation risk premium) and more volatile than we would like to see it," he said.

But in recent speeches, Bernanke has cautioned that the spread between other Treasury debt and inflation-protected securities does not provide a clear picture of inflation expectations.

Another Fed governor, Donald Kohn, said last week a widening in that spread could be a "warning sign" of rising inflation expectations, although he also said it might be misleading.

BUBBLE TROUBLE

In the Minneapolis Fed interview, Bernanke sided with Fed chief Alan Greenspan in arguing the central bank was better off focusing on the broad economy than trying to affect asset prices when bubbles may be building.

"I think it's extraordinarily difficult for the central bank to know in advance, or even after the fact, whether or not there's been a bubble in an asset price," Bernanke said.

Some economists have criticized the Greenspan-led Fed for allowing a stock bubble to build in the late-1990s that exacted a high economic cost when it burst.

Like Greenspan, Bernanke said the cure for a bubble could prove worse than the disease.

"If a bubble does exist, there is no guarantee that an attempt to 'pop' it won't lead to violent and undesired adjustments in both markets and the economy," he said.

"It is rarely, if ever, advisable for the central bank to use its interest rate instrument to try to target or control asset price movements, thereby implicitly imposing its view of the proper level of assets prices on financial markets," Bernanke said.

On a separate issue, Bernanke said the Fed should usually allow troubled banks to fail, but it might need to step in some instances to safeguard the financial system.

The interview is posted at http://minneapolisfed.org/pubs/region/.

 

 

 

 

 

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