Fallacies, Insults and Naivety Over the Way Fed Should Do Its Work

Letter to the editor published in The Financial Times

April 29, 2003



From Mr Edwin M. Truman.

Sir, Your editorial "A final term for Greenspan" (April 24) advocating an inflation targeting framework for the conduct and evaluation of US monetary policy reached the right conclusion but advanced the wrong arguments.

I participated in Federal Open Market Committee (FOMC) meetings for almost 25 years and am completing a study of inflation targeting from a global perspective. My conclusion is that the Federal Reserve, and also the European Central Bank and the Bank of Japan, should adopt the framework and can do so without change in their legal mandates. In the US case, the principal argument is that inflation targeting would increase the transparency and accountability of policy with little downside risk.

Your argumentation is false, insulting, misleading and naive. It is false that the US should adopt inflation targeting because there is not another Alan Greenspan to replace Alan Greenspan. The same argument was made 16 years ago about Paul Volcker. Any personalisation of US monetary policy is primarily a media phenomenon. It is insulting to the 19 dedicated women and men who serve on the FOMC to suggest that they are mere potted plants decorating the board table. They are a diverse and talented group nominated by different presidents, confirmed by different senates, who otherwise reached their positions through many different routes. Recorded dissents are a highly inaccurate guide to measuring contributions and accountability.

Finally, it is both misleading and naive to suggest that the constructive path to inflation targeting in the US lies through amendment of the Federal Reserve Act and the central bank's mandate. First, many successful inflation-targeting central banks have much less precise mandates. Second, all successful inflation-targeting central banks, regardless of their mandates, focus on full employment as well as price stability. Third, a little thought should convince you that the US does not need to adopt the UK system and have the Treasury secretary at the start of each administration articulate a new inflation target. In this connection, the present UK system has yet to pass the first test of institutional strength in a democracy-survival of a change in the party in power.

Letter to the editor refers to original article:
"A Final Term for Greenspan," (Financial Times, April 24, 2003, p. 12).