Bernanke pushes keeping inflation low

/ Source: The Associated Press

Ben Bernanke, in his first public speech as Federal Reserve chairman, laid out a scholarly case Friday that keeping inflation low and stable tends to foster economic growth and jobs.

This sensibility — now largely a consensus view — marked an evolution in economic thinking, Bernanke said in prepared remarks at Princeton University in New Jersey.

“Central bankers, economists and other knowledgeable observers around the world agree that price stability contributes importantly to the economy’s growth and employment prospects,” he said. “But that view did not always command the support it does today.”

Bernanke spent 17 years teaching economics at Princeton. A copy of his remarks was distributed in Washington.

During the 1960s and 1970s, some policy-makers believed there were trade-offs between the goals of keeping both inflation and unemployment low, and that one goal had to come at the expense of the other.

“Some influential voices of the time argued that by accepting higher inflation, policy-makers could bring about a permanently lower rate of unemployment,” Bernanke said.

“Clearly, though, the theory that a long-run trade-off exists between inflation and unemployment had sprung a serious leak,” he said, citing economic data from the past.

One of the things Bernanke would like to see the Fed do is numerically spell out acceptable bounds for inflation. Former chairman Alan Greenspan, who retired Jan. 31, didn’t like that approach, contending it could crimp the Fed’s flexibility.

Bernanke, who took helm Feb. 1, has said he would discuss this idea with his Fed colleagues and wouldn’t rush to implement such a policy.

In terms of setting interest rates, an inflation target wouldn’t make much practical difference because the Fed’s preferred range of inflation under Greenspan — which wasn’t publicly announced — was 1 percent to 2 percent, excluding food and energy prices. That’s the same range favored by Bernanke.

When prices are stable, businesses, consumers and investors don’t have to worry that inflation will eat away at their investments and paychecks. They also can feel more confident about longer-term financial planning.

Bernanke, in his prepared text, did not discuss the future course of interest rates.

For nearly two years, the Federal Reserve under Greenspan has been boosting interest rates to keep the economy and inflation on an even keel. That has left a key interest rate controlled by the Fed at 4.50 percent, the highest in almost five years.

Bernanke’s first meeting to examine interest rates is March 27-28. Many economists believe rates will go up again at that time.