Rosengren's Plan on Fed Inflation Goal Boosts Pressure on Powell
Boston Fed’s Eric Rosengren became the latest regional Fed leader to propose a review of the 2% inflation target.
(Bloomberg) -- Less than a month before he’s expected to take the reins at the U.S. central bank, Federal Reserve Governor Jerome Powell is getting an earful from a growing number of officials who favor a formal process that examines potentially radical changes to the bank’s policy goals.
Boston Fed President Eric Rosengren this week became the latest regional Fed leader to propose a review of the central bank’s 2 percent inflation target. At least six of the 12 regional chiefs now back the idea.
“We are approaching a time when a comprehensive reconsideration of the monetary policy framework is likely warranted,” he said Friday in the text of a speech in San Diego.
The building momentum among Fed policy makers reflects the discomfort caused by the outlook for long-term interest rates. Many economists believe low productivity and an aging population will make slow growth and low interest rates persist for several years. That means the Fed will have little room to ease borrowing costs to protect the U.S. economy when a recession strikes.
Proposals aimed at increasing the Fed’s room for maneuver include raising the inflation target, aiming for an average level of 2 percent inflation over an extended period of time and replacing the inflation target with a goal tied to nominal gross domestic product.
Optimal Level
Rosengren said he favors changing the framework in two ways: Fed officials should set a target range for inflation, perhaps 1.5 percent to 3 percent, and then, on a year-to-year basis, decide on an optimal level within that range.
He conceded that the plan would risk generating uncertainty about inflation in the medium and long run.
San Francisco Fed President John Williams argued the merits of the second idea, known as price-level targeting, earlier this week. At the same event in Washington on Monday, former Fed Chairman Ben Bernanke predicted the central bank will study alternative policy frameworks over the next year to 18 months.
Powell hasn’t commented on whether he supports the idea of reviewing the inflation target.
If confirmed in time by the U.S. Senate, Powell will replace Janet Yellen when her term as chair ends in early February.
To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net.
To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Alister Bull, Scott Lanman
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