For release: April 6, 2004

Contacts:	Joe Elstner
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FOMC Commitment to Price Stability
“Not in Doubt,” Says St. Louis Fed’s Poole

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LITTLE ROCK, Ark — The Federal Open Market Committee (FOMC), the Federal Reserve’s monetary policymaking body, hasn’t defined “price stability” numerically. Just the same, its commitment to price stability is solid.

That was the viewpoint of William Poole, president of the Federal Reserve Bank of St. Louis, as he spoke to a University of Arkansas–Little Rock audience at Little Rock’s Peabody Hotel.

“I’ve indicated on several occasions that my own inflation target is zero, properly measured,” Poole said. “Because all our measures of inflation have some upward bias, my definition of price stability is consistent with a small positive measured rate of
inflation. Our recent inflation experience is, I believe, a good approximation of price stability.”

After discussing the limitations of several theories meant to predict how future inflation might develop, Poole noted that “our ability to deliver significantly more accurate forecasts of inflation beyond those that can be generated from the history of inflation itself is quite limited. It’s close to impossible to discern that near future inflation will differ systematically from recent past inflation and society will just have to live, at least for a while, with recent history.”

There’s an alternative viewpoint, however, said Poole. “I believe that upcoming inflationary experience is most strongly anchored by how the public and financial markets expect inflation to evolve. In an economy that works this way, it’s essential that the central bank clearly state its inflation objectives and that this message is highly credible. If a central bank is committed to low inflation, and that commitment is credible, then the general public will believe future inflation will be low. That nominal anchor generates behavior by buyers and sellers that produces low and stable inflation. In the recent vernacular, this means few firms would have ‘pricing power.’”

Poole said that it is critically important for the FOMC to stay committed to act aggressively when inflation risks change, either up or down. “That commitment anchors market expectations of long-run inflation and makes the economy more robust against short-run inflation shocks,” he said. “Short-run disturbances don’t automatically get built into inflation, which helps dampen the impacts on the economy of inflation shocks.”

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