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An Inflation Target in All but Name

by TRAVIS PANTIN
Thu, 15 Nov 2007
updated Mon, 19 Nov 2007 at 10:17 AM

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Greg Ip of Real Time Economics (blogs.wsj.com/economics) reflects on the Federal Reserve's announcement yesterday that it will seek to improve communications with the public by both increasing the frequency and lengthening the horizon of Federal Open Market Committee forecasts.

Although the Fed will not provide a formal inflation target, Mr. Ip notes that what it will provide essentially functions as one. "The projection for inflation at the end of the forecasts can serve as an informal inflation target," he writes. "That's because the forecast is based on 'appropriate' monetary policy and three years is usually long enough for the Fed to get inflation to where it wants it."

On Market Movers (portfolio.com/views/blogs/market-movers), Felix Salmon elaborates on Mr. Ip's claim, even risking a prediction, which he describes with the following formula: I = C = H = c = h.

"Where I is the Fed's de facto inflation target, C is the most recent three-year core inflation forecast, H is the most recent three-year headline inflation forecast, c is the previous three-year core inflation forecast, and h is the previous three-year headline inflation forecast."

Mr. Salmon adds a caveat: "Every so often, this equality will not hold, and those will be interesting times. But I have a feeling that most of the time it will be true." In contrast, Jon Ogg of 24/7 Wall St. (247wallst.com) is not so sure that the Fed's announcement will provide Wall Street with a clearer picture. "Traders may actually like a more open Federal Reserve, but 24/7 Wall St. wonders how this will be any more accurate when you consider how the Fed has been behind the 8-ball over and over," he writes. "This is good on the surface, but the old maxim of 'be careful what you wish for' comes to mind when it boils down to forecasting out of academic economists. Unfortunately, the Fed's crystal ball is usually no better than that of the bond market."

* * *

AND THE NEXT NOBEL GOES TO … Ben Muse (benmuse.typepad.com) claims that 60% of Americans seem to think free trade is bad, citing an early November poll of registered voters conducted by NBC News and the Wall Street Journal.

The poll, which was mainly concerned with the strengths and weaknesses of different presidential candidates and parties, indicates that American voters "rank trade issues relatively low on the list of things they're worried about, but they don't think foreign trade has been good for the U.S." Professor John Palmer of EclectEcon (econoclectic.powerblogs.com) agrees. "I get the sense that everyone but economists thinks trade is bad," he writes. "Oh, to be sure most people like the lower prices we pay for so many things as a result of trade. But despite the low unemployment rates in North America, it just seems to me that most North Americans think trade is bad because it steals jobs from their fellow citizens."

He continues: "Perhaps the next Nobel prize in economics should go to someone who comes up with a presentation of the gains from trade that is super-effective in countering the anti-trade rhetoric of special interests."

The anonymous blogger at Bluematter (bluematter.blogspot.com) used stronger language: "The implications of the public's mistrust of markets are profound. Simply put, it's the resource allocation equivalent of having invented the chainsaw and insisting on using your nails to cut down trees."

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