One of the main things I took from chairman Bernanke’s speech last Friday was a wish to refocus attention on the Fed as an inflation-targeting central bank.

Although attaining the long-run sustainable rate of unemployment and achieving the mandate-consistent rate of inflation are both key objectives of monetary policy, the two objectives are somewhat different in nature.

Most importantly, whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy. Thus, while central bankers can choose the value of inflation they wish to target, the sustainable unemployment rate can only be estimated, and is subject to substantial uncertainty.

Moreover, the sustainable rate of unemployment typically evolves over time as its fundamental determinants change, whereas keeping inflation expectations firmly anchored generally implies that the inflation objective should remain constant unless there are compelling technical reasons for changing it, such as changes in the methods used to measure inflation.

I think this highlights the enormous problems caused by targeting inflation without being willing to be admit that you have an inflation target. The Fed fondly imagines that the world understands it is targeting inflation. It is not a surprise it believes this: it talks to economists who run models in which it has a 2 per cent inflation target and to hacks like me who are misspending our lives studying Fed-speak. Read more