In historic shift, Fed sets inflation target

Wed Jan 25, 2012 6:35pm EST
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By Jonathan Spicer

(Reuters) - The Federal Reserve took the historic step on Wednesday of setting an inflation target, a victory for Chairman Ben Bernanke that brings the Fed in line with many of the world's other major central banks.

The U.S. central bank, in its first ever "longer-run goals and policy strategy" statement, said an inflation rate of 2 percent best aligned with its congressionally mandated goals of price stability and full employment.

However, it said it was not appropriate to adopt a fixed goal for employment because the level of unemployment that can be achieved without sparking inflation is not largely determined by monetary factors.

The inflation target is at the high end of what was traditionally seen as an informal target range of roughly 1.7 percent to 2 percent. It caps a long crusade by Bernanke to open a window onto what for years had been the Fed's purposefully opaque and secretive deliberations.

"Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the committee's ability to promote maximum employment in the face of significant economic disturbances," the Fed said.

Skeptics, particularly among congressional Democrats, have in the past worried that an explicit inflation target would relegate the full employment goal to the back burner.

But Bernanke, perhaps with one eye to Capitol Hill, was careful to stress that setting an inflation target did not mean the central bank would lose sight of the other side of its dual mandate.

"We are not absolutists," he said at a news conference. "If there is a need to let inflation return a little bit more slowly to target to get a better result on unemployment, then that is something that we would be willing to do."   Continued...