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Fed's Plosser Lauds Benefits of Inflation Targets

Philadelphia Federal Reserve President Charles Plosser Monday lauded the benefits of formal inflation targets but said it was too early to tell if the Fed would move in that direction as part of a study on its communications.

However, Plosser termed the Fed "arguably less transparent" than a number of other central banks, including the European Central Bank.

Plosser praised the ECB's policy of "clearly stating price stability as its main objective and announcing a target for where it is going to keep the inflation rate."

Plosser did not specifically address the U.S. economy or monetary policy in remarks to a conference on EU expansion.

Formalized inflation targets boost a central bank's credibility because policy goals do not change as the members of the policymaking body change, Plosser said.

Plosser, who is not a voting member of the monetary policy-setting Federal Open Market Committee in 2007, is known as one of the Fed's more hawkish members on inflation.

"The FOMC is currently studying ways to further improve its communications. It is too early, however, to say precisely what the results of that inquiry will be," he said.

Plosser said that even the average U.S. inflation rate of 3.1% logged between 1986 and 2006 saw "a considerable depreciation" in purchasing power.

"To put it directly, policy-makers have come to accept the fact that price stability is and should be the primary focus of monetary policy," he said.

"Over a longer term, central banks create inflation and it is very important that we acknowledge and take responsibility for that fact," he said.

"If people believe the central bank is committed to price stability, they will make decisions that lead to better outcomes than if they believe the central bank will give into temptation and create higher inflation."

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