New Fed Chairman's Inflation Targeting Defined

Physician's Money Digest, February 2006, Volume 13, Issue 2

BusinessWeek

The hottest topic surrounding future FedChairman Benjamin Bernanke is his idea ofinflation targeting. But what exactly doesinflation targeting mean, and how will itaffect you as a physician-investor?According to ,the definitionof inflation targetingis when thecentral bank or electedgovernment chooses a goalfor the inflation rate, estimatesthe rate of inflation for thecoming year, and maneuvers monetarypolicy to meet the target inflation rate. Thispolicy is currently in place in a few countries,including Great Britain, Canada,Australia, Sweden, New Zealand, Brazil,and South Korea, and appears to be workingout well by stabilizing inflation ratesand smoothing out economic growth.Bernanke favors inflation targetingbecause he feels that businesses and consumerswould have more confidence aboutinterest rates and inflation. However, AlanGreenspan is against the policy, claimingthat publicly announcing a target ratewould make it difficult to respond to afinancial crisis or changing economic climate.Bernanke counters this by saying thefed would do whatever it takes to overcomean economic crisis, and that an inflationtarget would not stifle policy.