The Federal Reserve should move from a strict 2% inflation target to a broad, &q...
NEW YORK - The Federal Reserve should move from a strict 2% inflation target to a broad, “flexible” promise that inflation would average that level over time, a key member of the U.S. central bank’s board of governors said on Tuesday in one of the most explicit endorsements yet of changes in its monetary policy framework.
Her concept, she said during an appearance before the New York Association of Business Economics, is less strict than some of the other proposals being floated as part of the Fed’s current review of monetary policy. But she feels it would be more credible in the eyes of the public as a result, and give Fed officials more leeway in deciding how to set interest rates at any given point.
“The formality would be quite challenging to communicate ... It is a lot easier to say ‘we have been in the range of 1.5 to 2 over the last few years ... we would expect to see inflation in the two-and-a-half range for a period of years’ ... That is a fairly simply thing to communicate.”However, Brainard’s was the first explicit call from a member of the Fed’s Washington-based board of governors for a particular change to the central bank’s methods for managing inflation.
Fed officials acknowledge that their failure to hit the 2% percent goal for seven years running is a key problem that poses a variety of risks, including leaving interest rates stuck at ultra-low levels, and raising the likelihood that interest rates and inflation may all slip back to zero. That would force the Fed to again use “unconventional” tactics like bond purchases to boost the economy in a downturn.
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