Recently the Fed has been discussing changes to their inflation target as part of their dual mandate. If Fed officials hope to adopt a strict inflation target in the next year or two, they will also need to consider how the transparency of their actions are viewed by the larger economy. They have been moving towards greater transparency in the past few years, as they have expanded their communications strategies to include more information on their forecasts and regularly scheduled press conferences. Additionally, the Fed still must consider employment levels, since that is still technically part of their mandate.
Other central banks like the U.K. and the ECB have even greater transparency about their policy actions, but also have more restrictions regarding their activities. For example, the U.K. central bank has to explain their policy actions when they miss their inflation targets. In New Zealand, the central banker can lose their job if they do not get inflation into their target zone. The Fed isn’t considering adopting any of these measures, but they are facing some small operational changes.
Questions you might answer (Do not answer all points, just focus on one)
- Should the Fed be considering a move towards stricter inflation targets? Why or why not? Would it be better to maintain the flexibility they have had in the past going forward?
- What problems might arise if the Fed adopted a strict inflation targeting stance? Have other central banks who have taken these steps faced these types of problems? What flexibility is the Fed considering putting into their new policy?
- Does inflation targeting imply that the Fed would have done anything differently in the 2007-2008 crisis? If so, what might they have done differently? What might the policy stance today be if the Fed were strictly targeting inflation?