(Adds background on inflation targeting debate)
By Jonathan Spicer
MINNEAPOLIS May 21 U.S. inflation may not climb
back to 2 percent until 2018, so the Federal Reserve should
consider overshooting that target for a few years afterward to
make up for the current period of low prices, a top Fed
policymaker said on Wednesday.
Narayana Kocherlakota, president of the Minneapolis Fed,
floated the idea of "price level targeting" but did not
explicitly endorse it, saying in a speech the idea deserves
"serious discussion" at the U.S. central bank.
Under price level targeting, the Fed would let inflation run
above its 2-percent goal in the years ahead to make up for the
currently low prices for goods in the economy. As it stands, the
Fed practices "inflation targeting" in which it aims for the
goal at all times irrespective of past trends.
The Fed's preferred gauge of inflation, the personal
consumption expenditure or PCE, has averaged 1.5 percent since
the start of the recession in 2007. It is now just above 1
percent, which Kocherlakota said signals "wasted resources" in
the U.S. economy, especially among workers.
If the central bank were to move to target prices,
businesses would be more prone to hire and invest because they
would predict more stimulative future monetary policy and higher
demand. Such a decision "has the potential to affect the
near-term speed of the economy's recovery," Kocherlakota told
the Economic Club of Minnesota.
A voter on Fed policy this year, Kocherlakota added he
expects PCE inflation to run below 2 percent "for several years,
possibly until 2018."
The Fed has kept interest rates near zero since late 2008 to
promote growth and hiring. In part due to the last couple of
years of low inflation, it has also promised to keep rates low
for a while to come.
Kocherlakota recently backed off his most recent attempt to
boost accommodation: convincing the Fed's other 15 policymakers
to lower a stated unemployment threshold that would signal they
would considering raising rates. Instead the Fed has simply said
it would keep rates low for a "considerable" time after it stops
Kocherlakota said price targeting would make long-term
contracts safer for both borrowers and lenders, since inflation
would average closer to 2 percent over years. And, he said, it
would serve as an automatic stabilizer for the economy.
Chicago Fed President Charles Evans, who like Kocherlakota
is a dovish policymaker at the central bank, also floated price
level targeting a few years ago as a way to ramp up monetary
Most of the world's central banks target inflation and not
prices, for fear of letting inflation get too hot.
(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)