Ben Bernanke extolled the benefits of inflation targeting in his confirmation hearing to be the next Federal Reserve chairman yesterday, saying that a well-defined inflation objective was consistent with the Fed's current practices and Congressional mandate.
Mr Bernanke pledged continuity with Alan Greenspan's approach to monetary policy in a confident performance before the Senate banking committee. He singled out the importance of long-run price stability as the Fed's long-term objective, the benefits of a flexible "risk management" approach, and the strides the central bank has taken in increasing its transparency and accountability.
Referring to his academic and policymaking experience, he said: "My views on inflation targeting now are that it represents continuity with the existing approach of the Federal Reserve System.
"I'd like to emphasise to those who may be concerned that I do in no way intend to change the overall approach to monetary policy that was developed under Chairman Greenspan."
Many central banks including the European Central Bank have formal inflation targets. Mr Greenspan and some of his colleagues on the Federal Reserve board are sceptical that a rigid inflation target would improve the Fed's policymaking. Some politicians had expressed concern over Mr Bernanke's support for inflation targeting.
Mr Bernanke addressed the issue head-on in his prepared remarks, saying that a more formal inflation objective should be seen as a clearer explanation of the Fed's current practice rather than a fundamental shift.
"Providing quantitative guidance about the meaning of 'long-term price stability' could have several advantages, including further reducing public uncertainty about monetary policy and anchoring long-term inflation expectations even more effectively," he said. Mr Bernanke also played down concerns that such an approach went against the Fed's congressional mandate to pursue price stability and full employment.
"This step would in no way reduce the importance of maximum employment as a policy goal. Indeed, a key justification for this action is its potential to contribute to stronger and more stable employment growth by further stabilising inflation and inflation expectations."
Mr Bernanke stressed the importance of the Fed's political independence and said there would be no "precipitate" action and that a consensus would have to be reached at the Fed for any change in its approach.
It was the third time Mr Bernanke had appeared before the committee for a confirmation hearing: the Senate appÂÂroved his appointment as a Fed governor in 2002 and then as chairman of the White House Council of Economic Advisers earlier this year.
"In this prospective new role I would bear the critical responsibility of preserving the independent and non-partisan status of the Federal Reserve," he said ÂÂyesterday.
