Fed Will Probably Change Its Approach to Inflation, Dudley Says

(Bloomberg) -- Federal Reserve officials will probably change the framework they use to achieve their inflation target in a bid to stabilize U.S. inflation expectations, former New York Fed President William Dudley said.

“Right now, they have what’s called a bygones policy, and what that means is that if they miss on one side, they don’t try to miss on the other side to make up for it,” Dudley said Friday in an interview with Bloomberg Editor-in-Chief Emeritus Matthew A. Winkler.

“I think the Fed is going to change that policy subtly over time,” Dudley said. “They are going to talk about, ‘We want to hit 2 percent inflation on average.’ And that’s going to imply to people that if they miss on the low side for a while, that they’ll be willing to miss on the high side for a while.”

Dudley’s comments add to speculation that U.S. central bankers are considering changing the way they approach their inflation goal ahead of a Fed conference in June that will examine options for doing so. The central bank’s preferred measure of inflation has averaged just 1.5 percent since the last recession ended in mid-2009. Meanwhile long-term inflation expectations among U.S. households fell this month to match the lowest level on record, according to preliminary results of a University of Michigan survey published Friday.

While Fed officials have discussed allowing inflation to rise above their target temporarily, they haven’t openly campaigned for the strategy cited by Dudley to push inflation above 2 percent so it averages out over time. Dudley, 66, retired in June 2018 after nearly 10 years as New York Fed president, a post that holds a permanent vote on interest-rate decisions and traditionally serves as vice chair of the Federal Open Market Committee.

Other prominent economists and Fed watchers also have said that central bankers will probably change their methodology and welcome above-target inflation. That includes JPMorgan Chase & Co. chief U.S. economist Michael Feroli and Evercore ISI Vice Chairman Krishna Guha, who worked for Dudley at the New York Fed from 2010 to 2013.

Fed officials “will probably end up embracing a new framework that calls for modestly overshooting 2 percent at least in current circumstances,” Guha wrote in a report Friday.

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