Fed may need new framework to boost inflation: Daly

SAN DIEGO The US Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve president Mary Daly said on Friday.

And the Fed may need a new policy framework to lift inflation back up to its 2 per cent goal.

"We don't have a really good understanding of why it's been so difficult to get inflation back up," Ms Daly said, at the annual American Economic Association meeting in San Diego.

But with global growth slowing and the populations of most advanced economies ageing, Ms Daly said: "This new 'fighting inflation from below' is going to be with us, I would argue, for a longer period of time than just a few years."

As a result, "a new policy framework will likely be required" to boost inflation.

Ms Daly and her fellow policymakers are in the midst of a year-plus review of possible new approaches, including one in which the Fed would encourage too-high inflation to make up for periods of low inflation.

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Early indications are that any changes will likely be modest.

The Fed expects to release the results of its review in mid- 2020. It lowered US interest rates three times last year to a target range between 1.5 per cent and 1.75 per cent, in part to keep inflation from sinking amid rising global economic headwinds. Now that at least some of those factors, including US-China trade tensions, have eased a bit, policymakers said they will keep rates where they are for now.

Sluggish inflation gives the Fed room to keep interest rates low and probe how far down it can push unemployment, now near a 50-year low and well below what economists have long estimated should represent a fully employed American workforce, Ms Daly said.

"It's a great benefit that you can let the economy run a little bit more and you can actually see what full employment looks like," Ms Daly said.

But at the same time, low inflation poses a challenge, she said. "We are seeing some early evidence that long-run inflation expectations are slipping."

- REUTERS