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Chicago Fed CEO Weighs In on Anchoring Inflation

To keep the economy healthy, it’s critical to clamp down on expectations of inflation, and the Fed plays a crucial role in doing so, said Michael Moskow, president and CEO of the Federal Reserve Bank of Chicago.

“In the long term, inflation expectations are a function first and foremost of Fed credibility,” Moskow told news reporters, students, and friends of the GSB gathered March 7 at Hyde Park Center for the Distinguished Speakers Series. “Does the public believe that we will act to fulfill our commitment to achieving price stability? If this belief is widely held, then long-run inflationary expectations will be well anchored.”

He said inflation currently hovers near the upper edge of his comfort zone.

Some analysts fear the effects of the changing of the guard at the Fed with Ben Bernanke replacing long-time chairman Alan Greenspan. But Moskow said, “I’m not concerned. I have very high regard for Ben Bernanke. And he’s taking over a very strong institution.”

As head of the Chicago Fed, Moskow sits on the Federal Open Market Committee, which will be discussing whether more explicit numerical guidelines on inflation should be put in place. Some say such measures would enhance the Fed’s credibility. Bernanke has been a long-time proponent of such guidelines, but the committee currently has formed no consensus on the issue, Moskow said. He cited the need for more study before making a final determination.

Other risks to a healthy U.S. economic outlook include the possibility of an overvalued housing market and rising energy prices.

Rising energy costs, though typically excluded from so-called “core” measures to determine inflation, may indirectly have an impact when businesses pass on those costs to consumers by raising prices. For example, a furniture maker told Moskow that petrochemical prices have so raised the cost of polyfoam used in sofas and chairs that for the first time in 30 years, “the stuffing costs more than the fabric.”

Mary Sue Penn