Fed debates policy options for post-Greenspan era

Battle lines are drawn at the Federal Reserve between those who favour formal inflation goals and those who don't, and the debate is heating up ahead of the coming retirement of Chairman Alan Greenspan.
Vice Chairman Roger Ferguson and Board Governor Ben Bernanke staked out opposing positions on price targets at a St. Louis Fed bank conference earlier this month.
Bernanke is for targeting and Ferguson - joined on Friday by Governor Donald Kohn - is against.
"When central banks are not tightly focused on achieving a specific objective policy-makers may be granted a degree of discretion and can take account of the entire distribution of potential economic outcomes and their effects," Kohn told a conference in Germany.
Since Greenspan also prefers flexibility, there is little chance of a change under his watch, which is due to end January 31, 2006, when his board term expires.
Both camps agree the pursuit of an implicit inflation target between 1 and 2 percent for core inflation has helped the Fed achieve sustained price stability.
But the new chairman will still have to earn his or her anti-inflation credentials, a challenge Greenspan also faced when he succeeded Paul Volcker in 1987.
"Greenspan's influence grew over time," St. Louis Fed Bank President William Poole said at last week's conference, adding the Fed chief's deft handling of the October stock market crash shortly after he took the Fed's helm helped the new chairman cement his reputation.
Although the debate seems academic, Fed insiders say with Greenspan's impending departure it is an issue with significant long-term implications.
A strong Fed consensus that inflation is damaging and must be controlled has underpinned low US long-term interest rates in a vote of confidence from financial markets.
Still, there is no explicit reason why the Fed should keep to this path, beyond the fact that it says it will - a promise that has been good enough for the last 20 years.
Unlike the Bank of England or the European Central Bank, which has aims for inflation close to but below 2 percent, the Fed has not openly stated a specific price stability target.