Fed's Clarida Outlines Options for Review of Policy Framework

(Bloomberg) -- Facing a long-term environment of low interest rates and low inflation, Federal Reserve Vice Chairman Richard Clarida said it’s a good time for the U.S. central bank to undertake a review of how it goes about pursuing its twin goals of maximum employment and price stability.

Clarida’s speech is the first detailed outline of the Fed’s plan this year to conduct a series of events aimed at discussing its policy framework.

“In light of the unprecedented events of the past decade, we believe it is a good time to step back and assess whether, and in what possible ways, we can refine our strategy, tools and communication practices,” Clarida said Friday in the text of a speech he’s set to deliver in New York.

“It makes sense for us to remain open minded as we assess current practices and consider ideas that could potentially enhance our ability to deliver on the goals the Congress has assigned us,’’ he said at an annual conference on monetary policy hosted by the University of Chicago Booth School of Business.

The Fed’s framework review begins with an event in Dallas on Monday and will include a research conference in Chicago in June. Clarida said Fed will publish the conclusions of the review in the first half of next year.

He echoed Fed Chairman Jerome Powell’s comment that now was a good time to conduct the reassessment as the economy is “operating at or close to our maximum-employment and price-stability goals.”

Well Positioned

“By conducting this review, we want to ensure that we are well positioned to continue to meet our statutory goals in coming years,” Clarida said.

He said a variety of factors, including population aging and diminishing risk appetites, suggest that low interest rates will “persist for years.” That, in turn, increases the likelihood the Fed will run again into the so-called zero-lower bound, when interest rates hit zero before they can sufficiently stimulate a slumping economy.

In reviewing its fundamental strategies, Clarida made clear the Fed wouldn’t change its target for inflation from the current 2 percent level. Policy makers would consider, however, whether the central bank should introduce a strategy that seeks to make up for periods of below-target inflation with periods of above-target price rises.

Fed officials would also reassess how well their policy toolkit worked in combating the deep recession that followed the financial crisis of 2008-09, and consider what additional tools might be added to prepare for the next downturn. He mentioned a crisis-time policy implemented by the Bank of Japan, which would seek to establish a temporary ceiling for Treasury debt yields at longer maturities, as a tool that might be considered.

He added that the Fed would “assess the committee’s current and past communications and additional forms of communication that could be helpful,” referring to the Federal Open Market Committee.

Communication has been challenging for the central bank. In December, the Fed signaled it was prepared to hike two more times in 2019 despite swooning financial markets and worries that a wind-down of its massive bond portfolio could be making the volatility worse. Stocks fell further, forcing the Fed to shift its message to one of patience and flexibility, a pivot they ratified in their January statement and which helped calm investors.

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