7

Farewell to Inflation Targeting?

NEWPORT BEACH – In a four-day period in mid-December, three seemingly unrelated developments suggested that modern central banking is in the midst of an historic change. The implications go well beyond academia and policy circles. To the extent that this shift gains momentum – which appears likely – it will affect economic performance, the functioning of markets, and asset-price valuations.

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%.