US Fed Governor calls for ‘flexible’ average inflation target

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Nov 28, 2019 06:00 am

NEW YORK : The Federal Reserve should move from a strict 2 per cent inflation target to a broad, "flexible" promise it would average that level over time, a key member of the United States central bank's board of governors said on Tuesday, in one of the most explicit endorsements yet for changes to its policy framework.

Fed Governor Lael Brainard, in 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, 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, Ms Brainard said her recommendation would involve letting the pace of price increases run above 2 per cent 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 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, "I prefer a more flexible approach that would anchor inflation expectations at 2 per cent by achieving inflation outcomes that average 2 per cent over time or over the cycle," she said.- REUTERS