SAN DIEGO (Reuters) - The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary Daly said on Friday, and may need a new policy framework to lift inflation back up to the Fed’s 2% goal.
“We don’t have a really good understanding of why it’s been so difficult to get inflation back up,” Daly said at the annual American Economics Association meeting in San Diego.
But with global growth slowing and the populations of most advanced economies aging, Daly said, “this new ‘fighting inflation from below’ is going to be with us, I would argue, for a longer period of time than just a few years.”
As a result, she said, “a new policy framework will likely be required” to boost inflation.
Daly and her fellow policymakers are in the midst of a year-plus review of possible new approaches, including one in which the Fed would encourage too-high inflation to make up for periods of low inflation. Early indications are that any changes will likely be modest.
The Fed expects to release the results of its review in mid-2020.
The Fed lowered U.S. interest rates three times last year, to a target range between 1.5% and 1.75%, in part to keep inflation from sinking amid rising global economic headwinds.
Now that at least some of those factors, including U.S.-China trade tensions, have eased a bit, policymakers say they will keep rates where they are, barring a material change in the economic outlook.
Sluggish inflation gives the Fed room to keep interest rates low and probe how far down it can push unemployment, now near a 50-year low and well below what economists have long estimated should represent a fully employed American workforce, Daly said.
“It’s a great benefit that you can let the economy run a little bit more and you can actually see what full employment looks like,” Daly said.
But at the same time, low inflation poses a challenge, she said. “We are seeing some early evidence that long run inflation expectations are slipping.”
Reporting by Ann Saphir; Editing by Sandra Maler and Bill Berkrot