Bernanke made a target one of his priorities when he took the helm three years ago, though a 2007 review of Fed communications stopped short of that objective. Now, with inflation retreating and the economy contracting, a target could be used to justify a more expansive policy.
One measure of inflation, the personal consumption expenditures price index, minus food and energy, could rise at less than 1 percent this year, and only 0.5 percent in 2010, according to forecasts by Sack’s firm.
‘More Explicit’
Central bank officials discussed providing “a more explicit indication of their views on what longer-run rate of inflation would best promote their goals of maximum employment and price stability,” the minutes said. Such a target may “help forestall the development of expectations that inflation would decline below desired levels, and hence keep real interest rates low.”
An inflation goal would reinforce expectations that the central bank will make a commitment to withdraw cash when the economy shows signs of a recovery.
Some policy makers last month saw “significant risks that inflation could decline and persist for a time at uncomfortably low levels,” the minutes said. Price increases will probably “continue to abate because of the emergence of substantial slack in resource utilization and diminishing pricing power.”
Fed officials saw “substantial” risks to the slumping economy last month and indicated “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial,” according to the minutes.
‘Dark Document’
“Rates are going to be low for a long time,” said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “They see the economy as extremely weak. It is a dark document.”
Economic growth declined in the third quarter at the fastest rate since 2001 as unemployment rose and home values, housing starts, auto production and consumer spending fell. Analysts downgraded forecasts last month, with economists at Morgan Stanley and JPMorgan Chase & Co. predicting a contraction in gross domestic product of about 6 percent for the fourth quarter, the biggest decline in 26 years.
“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Federal Reserve Bank of San Francisco President Janet Yellen said in a Jan. 4 speech. “It’s worth pulling out all the stops” in a fiscal stimulus.
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