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Goldfinger

Base Rates Can Be Predicted

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http://www.bloomberg.com/apps/news?pid=206...&refer=home

The estimates provide a new perspective on the chairmen themselves. The target inflation rate for Alan Greenspan, Fed chairman from 1987 to 2006, is estimated to have been about 2.9 percent. Greenspan predecessor Paul Volcker, and William McChesney Martin, Fed chairman during the Truman and Eisenhower administrations, had targets that were not significantly different from that.

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Even so, the fact that Greenspan acted as if his target inflation rate, based on the consumer price index, was about 2.9 percent is useful. One should expect that the target for Bernanke is about the same.

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The results suggest that the CPI would need to be 50 to 75 basis points from the target in order to be statistically meaningful. In other words, if inflation jumps to around 3.3 percent, then we should expect more tightening. If it drops to around 2.4 percent, then we should count on rate reductions.

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