FOMC Minutes Excerpt:Framework Review: Introducing Inflation Range>

     WASHINGTON (MNI) - The following is an excerpt of the Federal Open 

Market Committee minutes describing committee's policy action, 

published Wednesday for the January meeting: 

     The staff's briefing on considerations regarding the use of an 

inflation range focused on three different concepts of an inflation 

range.  First, an uncertainty range could communicate the magnitude of 

the inherent variability of inflation that would still be consistent 

with achieving the Committees symmetric inflation objective.  Second, 

an operational range could signal that, under some conditions, the 

Committee would prefer inflation to be away from its longer-run 

objective for a time; such a range could potentially be used as part of 

a makeup policy strategy, including one based on average inflation 

targeting, or in other strategies aimed at offsetting the adverse 

effects of a binding effective lower bound on policy rates.  Third, an 

indifference range could communicate that monetary policy would not 

respond to deviations of inflation within that range.  The briefing also 

summarized the experiences of foreign central banks that use inflation 

ranges; these ranges were typically put in place many years ago, often 

in conjunction with adopting an inflation target.  The staff highlighted 

the communications challenges that could arise if an inflation range 

were introduced at a time when inflation had been running below the 

central bank's objective for a number of years. In this environment, the 

introduction of a symmetric range around the point objective could be 

misinterpreted as a sign that the central bank was not concerned about 

inflation remaining below its stated goal, a situation that could lead 

to inflation expectations drifting down to the lower end of the range. 

     Participants expressed a range of views on the potential benefits 

and costs of different types of inflation ranges.  Most participants 

expressed concern that introducing a symmetric inflation range around 

the 2 percent objective following an extended period of inflation mostly 

running somewhat below 2 percent could be misperceived as a signal that 

the Committee was comfortable with continued misses below its symmetric 

inflation objective.  Many participants agreed that an uncertainty range 

could be misinterpreted as an indifference range and hence as a lack of 

commitment by the Committee to its symmetric 2 percent inflation 

objective.  Some participants suggested that it was not clear that 

introducing a range would help much in achieving the Committees 

inflation objective; they noted that introducing a range could make that 

objective less clear to the public.  Instead of establishing a range, 

the Committee could continue to communicate that its inflation objective 

was symmetric around 2 percent.  While inflation is inherently variable, 

the Committee then could emphasize its intention for inflation to be 

centered on the 2 percent objective.  Nevertheless, in view of the 

inherent variability of inflation, several participants judged that 

there could be some benefit in communicating the inflation objective 

with a symmetric range around the point target.  In addition, a few 

participants suggested that an inflation range could convey the 

uncertainty associated with the available array of inflation measures or 

that the Committees communications could more explicitly reference 

other measures of inflation.  Several participants also stated that 

employing an asymmetric operational range for a timewith 2 percent 

being at or near the lower end of that range while still maintaining the 

longer-run target of 2 percent could help communicate that the Committee 

intended inflation to average 2 percent over time, which in turn could 

help keep longer-run inflation expectations at levels consistent with 

its objective. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: 

jean.yung@marketnews.com 

[TOPICS: MMUFE$,M$U$$$]