The Fed’s new strategy amounts to low-cal inflation targeting

The Fed’s new chief, Ben Bernanke, made a speech at the Cato Institute in Washington on November 14th. In this speech he set out his view on America’s monetary policies.
Central to his speech was his strategy for communication with the public. For the Fed communication is paramount. Trough communication, the Fed creates confidence with the public that is the underlying basis for a stable economy and tradings at stock exchanges throughout the world.

He revealed his policy for keeping inflation low and gave his forecast on the economy for the coming months.
Bernanke further explained the changes he has made and will make since he took over from Greenspan. Greater transparency is the buzzword that will bolster the Fed’s legitimacy and help preserve its independence. The two major changes are that he will give his prediction on the economy not two times a year but four times. The second change is that his predictions will be extended up to three years instead of two.

At first I believe the importance of communication for a central bank can’t be overestimated. The major role of a central bank is to create confidence in the economy among bankers, traders and economists in general and among the wider public.
Bernanke’s predecessor Greenspan had the confidence of the public. Bernanke is brand new at the job and still has to win over the trust.

Secondly I have some doubts about the predictions over a three year period. On the one hand such predictions may come in handy for longer term planning. On the other hand questions remain whether such long term predictions really can be made.

Sarah Struyf

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