NEW YORK – The Federal Reserve should move from a strict 2 percent inflation target to a broad, “flexible” promise that it would average that level over time, a key member of the US central bank’s board of governors said on Tuesday in one of the most explicit endorsements yet for changes in its monetary policy framework.
Fed Governor Lael Brainard, in prepared remarks for a speech to the New York Association of Business Economics, also said that if interest rates ever hit zero again, rather than simply relying on bond purchases as it did in the last crisis to stimulate the economy, the Fed should pledge to cap Treasury bond rates at different levels and intervene as necessary.
After sustained periods when inflation has been too weak, Brainard said, her recommended idea would involve letting the pace of price increases run above 2 percent for about the same amount of time.
Her concept, she said, is less strict than some of the other proposals being floated as part of a Fed review of monetary policy. But she feels it would, as a result, be more credible in the eyes of the public, and give Fed officials more leeway in deciding how to set interest rates at any given point.
Rather than some of the more theoretically promising but difficult-to-communicate ideas that are under debate, “I prefer a more flexible approach that would anchor inflation expectations at 2 percent by achieving inflation outcomes that average 2 percent over time or over the cycle,” she said.
As an example, if over a five-year period inflation averaged 1.5 percent to 2 percent, the Fed “would target inflation outcomes in a range of, say, 2 percent to 2.5 percent for the subsequent five years,” she said. Shifting the Fed’s target, rather than committing to an outcome, she said, would be “simpler to communicate” and not as tightly tie the hands of policymakers in the future.
The review that is underway is due to be completed next year, and no decisions have been made.
However, Brainard’s was the first explicit call from a member of the Washington-based board of governors for a particular change to the Fed’s methods for managing inflation.
It is also in line with recent comments by Fed Vice Chair Richard Clarida that the central bank’s existing framework was adaptable enough to meet the Fed’s inflation goals without a wholesale rewrite of how it does business, or adopting of proposals like “price-level targeting” that would involve strict commitments about future policy.
Other Fed policymakers have suggested the same in recent days, pointing to the framework producing an “evolution” in Fed policy rather than a revolution. – Reuters