June 09, 2008

Although there may be some disagreement as to whether the Fed is pursuing a price rule (and if so, what they are targeting), we do believe that the Fed is following a domestic price rule. In the past Ben Bernanke has favored an inflation target of 1% to 2%. Also, Donald Kohn has said that the rising oil prices have as much as a 0.5% downstream impact on the price level. Putting these two statements together gives us a 1% to 2.5% target range. The last issue to determine is the index targeted by the Fed. Again, in public speeches by the current Fed chairman and his predecessor, the PCE ex-food and energy seems to be the preferred target.

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