Bernanke Preps for His Barney Frank Showdown

Frank believes that it would be a "terrible mistake" for the Fed to employ a policy that other central banks have found useful in managing inflation. Bernanke is widely considered the forefather of inflation targeting and spent the first 18 months of his tenure surrounding himself with individuals who share a similar intellectual predisposition. The timing and choice of many of Frank's recent comments set the stage for one of the more interesting discussions on monetary policy to come along in quite some time.

Perhaps more problematically, it is quite clear that after a short period of time in power, the new majority on the Hill is laboring under an erroneous set of assumptions when it comes to exactly what the Fed can accomplish and what an inflation-targeting regime constitutes.

The Fed is not in possession of any magical powers that determine the rate of growth, employment or production. These are functions of private-sector risk-taking, consumer well-being and the virtues derived through a dynamic market. The Fed does not determine entrepreneurial innovation in the pursuit of profits, the nature of employment or the marginal productivity of the national labor pool.

Rather, the Fed possesses the tools to adequately manage the expectations of the market and the public with respect to the long-term level of inflation. The adoption of an inflation target would permit the Fed to anchor long-term inflation expectations to which Bernanke and the Fed pay such close attention around a transparent and efficacious policy.

More troubling is that the rhetoric, which permeates Frank's entire criticism of the Fed, is predicated on the very notion that Bernanke believes has been entirely discredited: that the Fed can choose to pursue more employment at the cost of a higher short-term inflation without any long-term costs.