Fed Officials Encourage Reassessment of Inflation Target

By Nick TimiraosFeaturesDow Jones Newswires

Two Federal Reserve officials said Monday the U.S. central bank should consider changes in its inflation-targeting framework to create more ammunition to respond to future downturns.

The Fed established a formal 2% inflation target six years ago, but in recent months some officials and other economists, including former Fed Chairman Ben Bernanke, have said the central bank should revisit the framework because interest rates now appear likely to remain much lower for longer. As a result, the Fed could find itself with less room to stimulate economic growth during the next downturn.

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The idea of revisiting the Fed's inflation target also has gained new attention because inflation has confounded officials' forecasts for years by consistently falling below the 2% target. Such targets can be less effective if officials are chronically unable to hit them.

Among different ideas, some have urged the central bank to instead target a given level of prices, such as a 2% annual increase.

San Francisco Fed President John Williams argued in favor of a price-level target during a presentation at the Brookings Institution in Washington. Mr. Williams outlined support for such a tool last November.

A price-level target would allow the Fed to make up for periods of below-target inflation by allowing offsetting periods of above-average inflation. This could allow policy makers to provide extra stimulus after the economy recovers from a downturn because officials would signal their willingness to tolerate longer periods of higher inflation.

Boston Fed President Eric Rosengren said in materials prepared for the conference he would prefer adopting an inflation range, rather than a precise target as the Fed currently does, because a range would give the Fed greater flexibility to allow for higher or lower inflation depending on how the economy is performing.

Others have said even if the Fed doesn't change its framework, it should establish a more formal process to automatically review its inflation target. The Bank of Canada, for example, automatically reviews its inflation target every five years.

Mr. Rosengren said the Canadian approach to periodically assess the inflation target would be useful, in materials prepared for the discussion in Washington on Monday. "In my own view, the costs of hitting the effective lower bound for a prolonged period should cause a reassessment of the 2% inflation target," Mr. Rosengren said.

Any change would only be effective if officials made a commitment to stay with that framework for a long time, Mr. Williams said, "so that people see that we are following it."

Some other Fed officials have said they are willing to entertain a debate but they don't think changes are warranted. "Let's achieve our 2% objective and then we can have a discussion," New York Fed President William Dudley said in an interview last November.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

January 08, 2018 15:06 ET (20:06 GMT)