Fed, BOJ chiefs wary

Federal Reserve Chairman Ben Bernanke said US inflation expectations were stable despite price swings in the past few years and signalled the Fed saw no need to change its current price commitment


Bank of Japan Governor Masaaki Shirakawa also warned of the danger of focusing too much on short-term price moves in policy decisions, underscoring his resistance to calls from politicians to set a rigid inflation target.

Bernanke, addressing a conference hosted by the Bank of Japan, dismissed suggestions the Fed might consider targeting a higher level of inflation.

“It will be a very risky transition if we in any way reduced our commitment to two percent or an approximate two percent inflation target. We’re not sure how expectations would react,” Bernanke told a question-and-answer session at the conference in Tokyo.

“Despite increases in inflation a few years ago and declines in inflation now, inflation expectations in the United States have been remarkably stable,” he said.

Bernanke was responding to a question about a proposal in an IMF staff paper that central banks might consider raising their inflation target to four percent so as to better tackle future deflationary crises.

In his speech, Bernanke repeated his plea for Fed independence, saying central banks best deliver steady economic growth and low inflation when free from political meddling.

“Political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation,” he said.

Both Bernanke and Shirakawa acknowledged that the line dividing monetary and fiscal policy became blurred when central banks took unconventional steps during the economic crisis. Shirakawa said such steps pushed central banks towards “quasi-fiscal policy” that put taxpayers’ money at risk.

The BOJ chief also said keeping prices under control was not enough to ensure economic stability, warning that low inflation historically tended to delay monetary tightening, brewed overconfidence in the economy and created bubbles.

Desirable price growth
“Price stability is certainly one important element in achieving a stable financial environment,” Shirakawa said.

“That is, however, not the sole factor. When a central bank feels constrained by short-term developments too much, that is more likely to amplify macroeconomic fluctuations.”

While the Fed is worried about proposals to subject its monetary policy to congressional audits, the BOJ has faced repeated government calls for more action to beat deflation.

The BOJ considers annual price growth of around one percent to be desirable in the long term, but is reluctant to commit itself to a setting target, as demanded by some lawmakers. Shirakawa said measuring prices has become difficult in recent years as the economy becomes more service-oriented.

“Shirakawa again tried to fend off government calls for inflation targeting,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.

“Globally, central banks are coming under more government pressure than before, but the BOJ seems to face the strongest pressure of all. Its recent measures are mostly aimed at appeasing the government.”

Shirakawa also said the swift and aggressive action taken by central banks during the crisis could breed long-term problems, such as the emergence of asset and credit price bubbles.

The minutes of the BOJ’s April 30 policy meeting showed that some board members were concerned about potentially unwelcome side effects of the bank’s monetary easing in March.

The concerns expressed were mostly about how low money market rates could discourage private banks from trading with each other and squeeze their profits, the minutes showed.

But some analysts said long-term concerns should not detract the central bank from the immediate task of ending the spell of price declines that threatens to derail Japan’s recovery by discouraging spending by consumers and businesses.

“Now, the risk of deflation is much bigger,” said Seiji Shiraishi, chief economist at HSBC Securities Japan.

The BOJ has kept rates at 0.1 percent since late 2008 and eased its policy in December 2009 and again in March by setting up and later expanding a facility offering cheap funds to banks.