NEW YORK (Reuters) - The debate over whether the Federal Reserve ought to replace its 2-percent inflation target with a new framework that could deliver more firepower against future economic shocks took a twist Friday as one leading proponent of such a switch appeared to soften his view.
“Within the mix of possible alternatives, the Fed needs to give strong consideration to staying with our current monetary policy strategy,” Chicago Federal Reserve Bank President Charles Evans said in remarks prepared for delivery to the Manhattan Institute Shadow Open Market Committee in New York.
Evans said he was not “prejudging” the best decision in the debate.
But he noted that all of the alternatives under discussion would require some period of above-2-percent inflation, and that such a situation could be difficult to explain to a public that might be distressed by the prospect of a rise in prices eating away at their buying power.
Sticking with the current 2-percent inflation target regime so long as the Fed steps up its communications game to bolster public faith in its ability to meet its targets could be a useful approach, he said.
With an aging population slowing the economy’s growth potential, the Fed projects it can raise rates only to about 2.75 percent before borrowing costs will really start to brake the economy.
With rates so low, there would be little scope to cut them to provide stimulus when the world’s largest economy next needs it, Evans and others worry.
That has fueled a debate at the Fed, and more widely, about raising the inflation target to, say, 4 percent, to give more room to deal with future downturns.
Evans himself has floated a strategy, known as price-level targeting, that would require the Fed to allow inflation to surge to make up for past shortfalls, could be a better framework than its current focus on balancing its goal of full employment against maintaining 2-percent inflation.
On Friday he suggested he is not wedded to a change, but only to better outcomes for the economy.
“When judging one alternative against another, it’s not a particular policy’s adherence to an instrument decision rule that is important, but instead its ability to deliver on the central banks’ mandated policy goals,” Evans said.
Reporting by Richard Leong, writing by Ann Saphir