Inflation Targeting and Accountability

When is an inflation target not an inflation target? When there's no accountability, says Clive Crook.

There is no real pressure on the Fed to hit its supposed "target". When the Bank of England overshoots its inflation target, it has to explain itself, and it cannot tell the Treasury, "Well, it was only a forecast." If inflation in 2010 is less than 1.5 percent or more than 2.0 percent, I'm willing to bet that that is exactly what the Fed will say.

I'm not convinced. For one thing, past inflation is just that – in the past. Explanations can't change anything. And in fact no one expected, when the Bank of England's inflation-targeting system was put in place, that the Great Moderation would preclude the Bank's Governor from having to write any letters at all for years on end. The stigma associated with that letter comes not from the inflation-targeting regime itself, but rather from the fact that such letters happen to have been very rare.

But what will happen if the Fed overshot its 2010 inflation forecast? I'm sure that the Fed will have lots of very good explanations, like "we had no way of stopping energy prices from passing through into consumer prices when oil hit $150 a barrel and Congress implemented a carbon tax on top of that", or something about China. There's no need for them to pooh-pooh their 2007 forecast and imply that it really wasn't very important.