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Central banks should not respond to wild swings in food and energy prices with monetary policy unless expectations of inflation become unhinged, a senior U.S. Federal Reserve official said on Thursday.

Large commodity price moves can have a detrimental impact on emerging economies, but it is “generally a mistake” to use monetary policy as a tool to lessen such effects directly, Philadelphia Federal Reserve Bank President Charles Plosser said.

“Movements in relative prices drive resource allocations, and one cannot and should not think of monetary policy as a tool to prevent those sometimes painful adjustments,” he said in remarks prepared for delivery to a conference in Singapore sponsored by the Global Interdependence Center.

Plosser said that food and energy price shocks pose challenges to central bankers as they can raise expectations of future inflation in a way that could become a self-fulfilling prophecy.

“A large relative price shock has the potential to undermine public confidence in the central bank’s ability to keep inflation low and controlled, which in turn could lead people to alter their expectations of future inflation,” Plosser said.

Plosser, who will be a voter on the Fed’s policy-setting Federal Open Market Committee in 2011, did not address the outlook for U.S. monetary policy or the economy.

Instead, the Philadelphia Fed chief, who is known as an anti-inflation “hawk,” reiterated his call for a systematic approach to policy-making and a target for inflation.

“Systematic, rule-like policy leads to a more stable, predictable and efficient economy,” Plosser said cash advance now.

“Uncertainty regarding policy makers’ goals and the actions they will take to achieve them can make it more difficult to achieve those goals,” Plosser said.

While more than 20 countries have explicit inflation targets, a public commitment to a clear monetary goal, the United States does not.

The U.S. central bank is mandated by Congress to pursue both full employment and stable prices.

Fed policy makers for years have wrestled with the question of whether an inflation target would improve the economy’s performance. While they have stopped short of adopting an explicit target, this year they began to offer a long-run forecast of inflation to help define their view of price stability.

Plosser said there was evidence countries that target inflation have better anchored inflation expectations than those who don’t.

Establishing an inflation target can prevent both expectations of inflation and deflation from becoming unanchored, he said.

Critics of inflation targets say they reduce policy flexibility, but Plosser argued that requiring central banks to explain deviations from their target is actually an advantage as it enhances transparency. He noted that no country that has adopted inflation targeting has subsequently abandoned it.

Plosser said that in recent years inflation expectations in most countries have remained “quite well anchored” thanks to the more systematic and transparent approach to monetary policy that many central banks have adopted. 

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