Ben S. Bernanke achieved one of his primary goals as Federal Reserve chairman yesterday by setting a numeric goal for inflation, advancing his legacy of greater transparency at the world’s most influential central bank.
The Federal Open Market Committee committed to holding inflation at 2 percent, concluding years of debate that Bernanke advanced after becoming Fed chief in 2006. ...
The personal consumption expenditures price index -- the price measure officials chose for their inflation target -- is expected to be below the 2 percent goal at the end of this year. The FOMC’s central tendency estimate for the PCE index was 1.4 to 1.8 percent for this year, 1.4 percent to 2 percent next year, and 1.6 percent to 2 percent in 2014. The measure rose to 2.5 percent for the 12 months ending November.
Their measuring stick is flawed (of course):
Well, we got an inflation target from the Fed. Basically, thinking at the Fed has been eliminated. The process has been automated. Bernanke has convinced the Fed board to adopt Core PCE as a determinate of monetary policy. So long as CPCE stays below 2%, Ben is going to have his foot planted on the monetary metal. It’s “full speed ahead” according to the Chairman. He's pushed things off until 2014 - a very long time from now.
My question: “Why is the Fed using CPCE versus another measure of inflation?” The very good news is that there is answer, and it comes from a very "reliable" source – The Federal Reserve. A detailed analysis on this topic was conveniently made public just a month ago.
Jim Rickards says inflation targeting is a blank check for QE. It allows the Fed to enagage QE whenever they feel the need (when their CPCE model tells them so) without constraints on when it might end or the need to announce it explicitly to the market: