The rules of US monetary policy have changed: the Fed has revised its reporting procedures in a potentially significant way. The first set of the more detailed minutes of FOMC meetings that Ben Bernanke promised last week was published on Tuesday, covering the meeting that took place on October 30-31.
I'm still unsure whether it is correct to regard the new regime as de facto inflation-targeting, as many Fed-watchers are suggesting. The case for this interpretation is that (a) the Fed is now publishing three-year-ahead inflation forecasts; (b) these forecasts are conditioned on "appropriate monetary policy"; and (c) three years is long enough for "appropriate monetary policy" to get inflation to the desired rate. But there are a couple of complications. One is that the Fed publishes a range of inflation forecasts, encompassing the individual projections of FOMC members. For 2010 the range is 1.5 percent to 2 percent. But this does not quite mean that the FOMC collectively regards a range of 1.5-2.0 as appropriate. Even assuming that all the members agree with (c), which they may not, it means that at least one member thinks a rate of 1.5 percent is appropriate in 2010 under expected circumstances whereas at least one other thinks that a rate of 2.0 percent is appropriate.
Well, since the range is narrow, one could overlook this--especially if the spread continues to be just half a point in future. We will see about that. But I would still hesitate to call this even a de facto inflation-target regime. The big thing that is missing is accountability. There is no real pressure on the Fed to hit its supposed "target". When the Bank of England overshoots its inflation target, it has to explain itself, and it cannot tell the Treasury, "Well, it was only a forecast." If inflation in 2010 is less than 1.5 percent or more than 2.0 percent, I'm willing to bet that that is exactly what the Fed will say. Unless, of course Bernanke tweaks the rules again in the meantime.
