WASHINGTON (MNI) – Following is the text of a statement Tuesday by
the Shadow Federal Open Market Committee recommending that Fed Chairman
Ben Bernanke formally announce the Fed’s commitment “to an explicit
mandate-consistent rate of inflation” for the long run and give a
framework for credibly delivering low inflation:

The Shadow Open Market Committee has long advocated increased
transparency in the Federal Reserve’s communications with the public. We
commend Chairman Bernanke’s thoughtful initial press conference on April
27, 2011 for creating an additional gateway for deepening our
understanding of the Federal Open Market Committee’s (FOMC’s) monetary
policy decisions and its views on the economy.

A critical aspect of the initial press conference was the
Chairman’s discussion of the FOMC’s monetary policy stance in light of
medium term projections for at or below trend economic growth and
continued elevated levels of unemployment. These sobering projections,
in light of the Feds unprecedented expansive monetary, credit, and
interest rate policy since the crisis began, are testimony to the limits
of what monetary policy can achieve in generating economic growth and
jobs in the medium to long term.

As stated in our prior statement on April 27, 2011, we re-iterate

“Although effective communication is an essential component of
monetary policy, communication itself can only clarify and reinforce
clearly-stated strategic policy objectives and guidelines for how the
Federal Reserve intends to achieve its objectives. Communication
cannotsubstitute for a lack of clarity about objectives or about plans
for realizing those objectives.”

The Shadow Open Market Committee recommends that the Fed continue
to clarify its objectives and guidelines as follows to facilitate
communication with the media and the public via the Chairmans press

First, the Chairman should formally announce the FOMC’s commitment
to an explicit ‘mandate-consistent’ rate of inflation that it uses as
its long run objective for its policy deliberation. At the same time,
the Fed should articulate its strategic framework for credibly
delivering a low inflation environment based upon the view stated by
Chairman Bernanke at the April 27th, 2011 press conference that, In
contrast to economic growth and unemployment, the longer-run outlook for
inflation is determined almost entirely by monetary policy. The
Chairman should also specify the Feds method for measuring progress
towards its inflation mandated target and over what time horizon it
wishes to meet thistarget.

It is long overdue for the FOMC to adopt a credible inflation
targeting framework. The Shadow Open Market Committee continues to
recommend that the Fed formally and unilaterally adopt a priority for
targeting low inflation as necessary “operationally” to achieve best
outcomes for both inflation and unemployment over the longer run. We
believe that such a step, while potentially controversial, fulfills the
Feds obligation to the dual mandate since only by creating a low
inflation environment can the Fed create the environment for maximum

The current high unemployment rate in the U.S. primarily reflects
structural issues that are beyond the Fed’s limitations, which draws
attention to the need for clarification of the dual mandate. The Shadow
Open Market Committee’s recommendation that the Fed adopt a priority for
targeting low inflation as the means to fulfill the dual mandate follows
the best practices of monetary policy adopted throughout the world, and
is informed by Feds policy failures in the 1970’s and its subsequent
successes in later decades. Indeed, as then Governor Bernanke stated in
his March 25, 2003 speech, an inflation targeting framework allows both
price stability and well-anchored inflation expectations; the latter in
turn facilitates more effective stabilization of output and employment.

Second, as QE2 arrives at its scheduled close, the Fed should
provide both a thorough self-assessment as well as welcome an
independent assessment of it for several reasons. First of all, the Fed
justified QE2 by indicating it would lower long term interest rates,
prevent the threat of deflation, and address the rise in the
unemployment rate that was largely cyclical in nature, suggesting
insufficient demand in the economy. These claims should be evaluated in
light of the historical experience: an initial rise in long term rates,
an unchanged employment picture, a modest rise in headline inflation,
and an increase inexcess reserves held at the Fed that is almost as
large as QE2 itself.

Moreover, a thorough post-evaluation of QE2 will help inform the
Feds eventual exit from its balance sheet expansion. Similarly, it
could also inform a potential further expansion of its balance sheet in
any subsequent QE3. Indeed, should the FOMC consider at some point in
the future to further increase its balance sheet by purchasing
additional government securities, lessons learned, even unpleasant ones,
will provide a benchmark for sizing QE3 as well as the wisdom for
conducting such operations.

Third, as elected members of the legislative and executive branches
of the U.S. government wrestle over the political and economic
dimensions of fiscal policy, we advocate that Chairman Bernanke
emphasize the imperative for fiscal authorities to stand by the “full
faith and credit” commitment for US Treasuries. The Chairman should
articulate why a Treasury default should be one of the last options ever
undertaken by the US government, and the likely consequences that any
deterioration of the status of U.S. Treasuries would have on financial
markets, financial firms, and our economic well being. The Shadow Open
Market Committee continues to advocate for broad fiscal reform that
establishes a tax policy that enhances economic supply conditions in the
U.S., that cuts wasteful spending, and that establishes a size of
government and benefits that reflects our values and allows us to live
within our means.

Finally, the Chairman should address what plans the Fed has in
place to deal with the ongoing financial crisis in Europe that stems
from the possibility of a sovereign debt default or restructuring by
Greece and potentially other countries. For instance, what arrangements
has the Fed made with the European Central Bank and other Central Banks
to address future financial and creditmarket reactions to the European
situation? Second, given that any re-structuring or default on European
sovereign debt will trigger large gains and losses in the market for
credit default swaps, the Fed should explain what oversight they have
put in place to insulate US financial firms it oversees from this

** Market News International Washington Bureau: (202) 371-2121 **