Bloomberg News

Fed Sets Price Goal as Forecast for Inflation Declines Below 2%

January 26, 2012

Jan. 25 (Bloomberg) -- The Federal Open Market Committee set a goal for 2 percent inflation and forecast that prices will rise this year at a slower pace than their objective.

Inflation at that level “is most consistent over the longer run with the Federal Reserve’s statutory mandate,” the FOMC said in a statement on its longer-run goals.

Chairman Ben S. Bernanke said in a press conference that inflation below 2 percent, along with a decline in U.S. unemployment that’s deemed too slow, may prompt Fed officials to increase accommodation. The central bank has already kept interest rates close to zero since December 2008 and expanded its balance sheet by buying $2.3 trillion in bonds.

“If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then the logic of our framework says we should be looking for ways to do more,” he said.

The Fed joins central banks such as the Reserve Bank of New Zealand, the central bank of Sweden and the Bank of Mexico in specifying an inflation goal. Unlike its counterparts, the U.S. central bank must also follow a congressional mandate to promote full employment, or the maximum amount of jobs created before firms bid up wages.

The 2 percent inflation target has been years in the making and was a primary goal for Bernanke, who mentioned it in his nomination hearing in November 2005. The gauge of inflation used by the Fed is called the personal consumption expenditures index.

‘Quite Low’

Bernanke said “there are a number of factors” suggesting to policy makers that inflation will “be quite low” during the next couple of years. He cited a flattening in commodity prices, restrained pressure on wages and “well-anchored” inflation expectations.

The Fed said in its statement on longer-run goals and policy strategy that it would “not be appropriate” to fix a goal for the unemployment rate because the elements that determine maximum employment “change over time and may not be directly measurable.”

In their forecasts of the economy, also released today, the Fed said it would miss both of its current longer-run objectives. Most policy makers see inflation at 1.4 percent to 1.8 percent in 2012, down from the 1.4 percent to 2 percent range they expected in November.

Also, by the end of 2014 Fed officials expect unemployment to range between 6.7 percent and 7.6 percent, according to the forecasts. In contrast, most Fed officials say unemployment can eventually fall to 5.2 percent to 6 percent.

This Month

The unemployment rate declined to 8.5 percent in December, according to a report earlier this month from the Department of Labor.

“At 8.5 percent we are comfortably above anyone’s estimate” for the natural rate of unemployment, Bernanke said in his press conference.

William C. Dudley, president of the Federal Reserve Bank of New York, said in a Jan. 6 speech that the outlook for unemployment “is unacceptably high relative to our dual mandate and the outlook for inflation is moderate.”

Consequently, it’s “appropriate to continue to evaluate whether we could provide additional accommodation in a manner that produces more benefits than costs,” he said.

The 58-year-old Bernanke was a leading advocate of inflation targeting as a Princeton University professor. He is the author of “Inflation Targeting: Lessons from the International Experience” with Columbia University economist Frederic Mishkin, Bank of England Monetary Policy Committee member Adam Posen and economist Thomas Laubach.

--Editors: James Tyson, Christopher Wellisz

Craig Torres in Washington at ctorres3@bloomberg.net

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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