Federal Reserve chairman Ben s. Bernanke responded to criticism from Paul S. Krugman, Nobel Prize winner, yesterday, calling his advice to boost employment by increasing inflation as “reckless”.
“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”
Krugman, whom Bernanke hired in 200 at princeton university believes that Bernanke should increase the target inflation rate of 2 percent in order to boost employment. Krugman believes that this idea is in line with statement that Bernanke made in 2000. Bernanke stated that Japan should seek to boost inflation in order to escape deflation. Japan experience a drop of .2 percent in consumer prices that year.
“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said.
Bernanke denies that the advice he gave in 2000 regarding Japan does not contradict what he is doing now.
“So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies,” Bernanke said. “That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.”, said Bernanke.
Bernanke said that the main difference between what he said 15 years ago and now is that Japan was experiencing deflation, the United States is not experiencing deflation and is currently meeting the target inflation rates set by the Federal Reserve.
“The U.S. today doesn’t face a deflation threat, in part because the Fed expanded its balance sheet to $2.88 trillion through $2.3 trillion in bond purchases”, Bernanke said. The FOMC today raised its estimate for personal consumption expenditures price index for this year to 1.9 percent to 2 percent versus 1.4 percent to 1.8 percent in January.
Bernanke said that an increased inflation rate would deteriorate the Feds reputation of providing a stable monetary policy as well as removing the ability to provide other accommodative monetary policies in order to achieve the same employment goals.
Bernanke went ont o say:
“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years,” Bernanke told reporters. “To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”
Bernanke, 58, joined Princeton, in New Jersey, as a professor in 1985, according to the central bank’s website.