Cambridge, Mass. – Federal Reserve Chairman Ben Bernanke said Tuesday that inflation expectations “remain imperfectly anchored” in part because the public doesn’t know the central bank’s goal for prices.
What inflation rate the Fed prefers “is not fully known by private agents,” Bernanke said in a speech to the National Bureau of Economic Research. “Long-run inflation expectations do vary over time. They are not perfectly anchored.”
He defined “anchored” inflation expectations as a condition where relative prices change, though overall prices remain stable in the event of a supply shock such as higher energy costs.
Variability in the public’s outlook raises “issues of credibility and institutional design,” he said. Bernanke has sought to de personalize policymaking and commissioned a study on Fed communication a year ago.
As a Fed governor and academic, he was critical of the central bank for basing its credibility in the office of the chairman instead of the institution. Bernanke, who didn’t comment on the outlook for the economy or interest rates, still acknowledged that expectations are more tethered than they have been in the past.
“The sharp increases in energy prices over the past few years have not yet led either to persistent inflation or to a recession, in contrast, for example, to the U.S. experience of the 1970s,” Bernanke said. “Although inflation expectations seem much better anchored today than they were a few decades ago, they appear to remain imperfectly anchored.”
Bernanke also said that as long as price expectations are well anchored, the Fed is justified in using core measures of inflation, which exclude energy and food costs.
“If inflation expectations are well anchored, changes in energy and food prices should have relatively little influence on core inflation,” Bernanke said.
“The basic theme is, the Fed is committed to maintaining stable inflation expectations,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Conn.
