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Boston policy conference: clues to what's coming from the Fed?

By Neil Irwin
BOSTON -- Once in a while, there is an academic gathering that, thanks to a combination of topic and timing, has importance far beyond the ivory tower. The Federal Reserve Bank of Boston monetary policy conference that begins Thursday evening has the feel of such a moment.

The topic, planned long ago, is "Monetary Policy in a Low Inflation Environment." It comes less than three weeks before Fed policymakers will need to make a crucial decision on how to set monetary policy in this low-inflation environment. There is every reason to expect that at its Nov. 2-3 meeting the Fed will pull out new, unconventional tools to try to boost the economy and push up inflation, all the more so after disappointing data on international trade and initial jobless claims was released Thursday morning.

Federal Reserve Board Chairman Ben S. Bernanke is scheduled to speak at 8:15 Friday morning on monetary policy and ways to deal with low inflation. Financial markets will be watching the speech for hints of what the Fed will do in early November, but I suspect Bernanke will offer little hint of the exact size and composition of a new bond-purchase program that the central bank is likely to announce next month. There remains a great deal of discussion within the Fed about what form such new action would take, and Bernanke will want to use the two-day meeting to build consensus on the Fed policy committee, rather than lock himself into one approach with a public speech now.

What I do expect to gain from his speech is a better sense of how Bernanke views the Fed's options from here on: What techniques for further easing are on the table if economic data continues to disappoint and inflation stays well below the 1.8 to 2 percent level that Fed leaders unofficially target?

Minutes of the last Fed meeting released this week raised some possibilities for increasing inflation and economic performance, and a few Fed officials (including New York Fed president Bill Dudley) have raised the ideas publicly.

  • The Fed could formalize its inflation target, explicitly aiming for 2 percent inflation instead of the loosely understood goal currently in place.
  • The Fed could shift to a "price-level targeting" regime, indicating that, for example, for every year that inflation hits a percentage point below 2 percent, the Fed will allow commensurately higher inflation in the future.
  • A third option is to target a certain level of nominal growth domestic product, a variation on encouraging somewhat higher inflation over the next couple of years. The Fed would aim for GDP to rise not merely in inflation-adjusted terms, but in the number of dollars of output the country was producing.

What we don't know from the Fed minutes is whether Bernanke himself believes any of these options are possible. In a closely watched speech in late August, Bernanke said that he did not see support among Fed policymakers for raising the Fed's inflation target.

In the speech Friday morning, he has the opportunity to clear up where he stands and to offer an intellectual framework for how the Fed will respond over the coming year if the economy doesn't change and inflation remains lower than the central bank would prefer.

Look for coverage of Bernanke's speech here tomorrow morning, along with some of the papers being presented by top scholars of monetary policy during the day.

By Neil Irwin  | October 14, 2010; 4:47 PM ET
Categories:  Federal Reserve, U.S. Economy  
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