Bernanke: Fed taking step toward inflation target

WASHINGTON (Reuters) - The U.S. Federal Reserve took a step toward setting a target for inflation on Wednesday as Chairman Ben Bernanke said the central bank would issue longer-range projections on how it expects the economy to perform.

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In a speech to National Press Club, Bernanke said the central bank would publish projections that would offer a view on how the Fed expects the economy to perform beyond the central bank’s normal three-year forecast horizon.

The first set of forecasts will be included in minutes from the most recent meeting of the policy-setting Federal Open Market Committee, set for release later on Wednesday.

“The longer-term projections of inflation may be interpreted ... as the rate of inflation that FOMC participants see as most consistent with the dual mandate given to it by Congress -- that is the rate of inflation that promotes maximum sustainable employment while also delivering reasonable price stability,” Bernanke said.

Take on-the-record questions from the media for the first time since becoming Fed chairman, Bernanke said the long-run projections should help anchor the public’s expectations about the future path of inflation in a way that could help prevent a self-feeding inflationary, or deflationary, psychology.

When he took the helm at the Fed in 2006, Bernanke was a vocal proponent of setting a numerical target for inflation. However, that has been a subject of much debate among other Fed officials, some of whom worry that setting an explicit target would limit the central bank’s flexibility.

But with the central bank increasingly concerned that falling prices will trigger a dangerous round of deflation and prolong the recession, some economists had speculated that the Fed would extend its forecast horizon to provide a signal on where it thinks longer-term inflation should be.

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The Fed chairman disclosed no new programs to aid the economy. He also made no mention of buying longer-dated Treasury debt, which he discussed in January as a way to ease borrowing costs but made no public mention of since. That has led some observers to conclude that the Fed was backing away from the idea.

Bernanke said aggressive steps the Fed had taken to combat the financial crisis were paying off as evidenced by lower borrowing costs in markets for commercial paper and mortgages.

“These policies appear to give the Federal Reserve some scope to affect credit conditions and economic performance, notwithstanding that the conventional tool of monetary policy, the federal funds rate, is nearly as low as it can go,” Bernanke said.

He acknowledged concerns that the Fed’s lending programs, which have more than doubled its balance sheet to about $2 trillion, exposed taxpayer money to greater risk, but said the central bank had acted appropriately to limit potential losses.

“For the great bulk of Fed lending, the credit risks are extremely low,” he said.

He also dismissed concerns that expanding the Fed’s balance sheet would stoke inflation, pointing out that with global economic activity so weak and commodity prices low, there was little risk of unacceptably high inflation in the near term.

“However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to moderate growth in the money supply and begin to raise the federal funds rate,” he said.

Reporting by Mark Felsenthal, Emily Kaiser and Alister Bull, Editing by Chizu Nomiyama