Column: Farewell to inflation targeting?

The three developments began on December 12 in the United States, where the Federal Reserve, led by Ben Bernanke, announced that it will go much further than doubling (to $1 trillion) the volume of market securities that it intends to buy in 2013 in order to stimulate the economy. The Fed also left no doubt that it will maintain its foot on the accelerator until the US unemployment rate declines significantly, at least to 6.5%, and as long as inflation is contained at or below 2.5%.

According to most analysts, the novelty in the announcement was the Fed’s willingness to be explicit about its quantitative policy thresholds and, therefore, about the future course of its monetary policy. But my reading of what the Fed announced (and what Bernanke said in the subsequent press conference) suggests that the innovation goes beyond this.

The Fed is taking very different approaches to the specification of the two quantitative thresholds: unemployment will be based on historical data, while inflation will be based on the Fed’s own projections. This subtle difference has interesting operational effects. Most important, it prioritises the unemployment objective over the inflation target. This realignment of the Fed’s dual mandate, which I

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