February 10, 2020 / 6:56 PM / 10 days ago

Fed's Daly: Inflation is 'far better' a bit above target than below

FILE PHOTO - San Francisco Federal Reserve President Mary Daly reacts at the Los Angeles World Affairs Council Town Hall, Los Angeles, California, U.S., October 15, 2019. REUTERS/Ann Saphir

(Reuters) - A top U.S. central banker on Monday called for using new tools to push up stubbornly low inflation as an aging population slows economic growth worldwide and globalization and other trends keep a lid on prices.

“We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment,” San Francisco Federal Reserve Bank President Mary Daly said on Monday in remarks prepared for delivery in Dublin, Ireland.

The Fed, like many other central banks, targets 2% inflation but except for a short time in 2018 has failed to meet that target for most of the past decade.

That’s despite low unemployment, 3.6% in January, that economists had expected would push inflation upwards but has not done so.

As a result, Daly said, the central bank has been able to let “the economy run past what we thought was possible,” enabling many people, especially from disadvantaged backgrounds, to get jobs who otherwise might not have had the chance to.

But without the lever of low unemployment to push up inflation, the central bank is now exploring the possibility of adopting new tools, including average inflation targeting, to coax inflation higher.

The Fed is currently engaged in a review of its strategy framework that it expects to conclude by mid-year, and Daly is among those who have supported considering more aggressive ways to reach the Fed’s inflation target.

With low rates and low inflation, the Fed has less room to fight a future downturn than in the past, Daly warned.

“With monetary policy facing its own limits, fiscal policy will need to play a larger role in smoothing through economic shocks,” Daly said. “Spending on things like infrastructure, research and development and education pays off and actually increases the productive capacity of the economy in the longer run.”

Reporting by Ann Saphir; Editing by Cynthia Osterman

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