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WASHINGTON: The Great Recession ended 10 years ago this month, but for the US Federal Reserve, spinoffs have emerged as a decisive choice: knock the Americans off waiting for a rise in Inflation, or keep the printing press ready for the next economic downturn.
This politically cumbersome decision is being discussed in Chicago this week to discuss the risks and benefits of two controversial strategies to counteract a future economic downturn.
One of them is hard to sell: convince elected officials and households that higher prices today could generate more stable jobs in the future.
The other would leave intact the Fed's current approach to inflation, but means that the next recession will likely require the bond-buying and unconventional strategies used to fight against the last, with less certain results and a political cost for the Fed.
"They are facing two possible outcomes, both of which are challenging," said Adam Posen, director of the Peterson Institute for International Economics and moderator of one of the panels in Chicago. "The political difficulty, but not economic, is that they manage to outperform inflation."
"The biggest concern is that we are entering the next recession without ammunition, we have reduced rates to zero and proceeded to quantitative easing," Posen said. "It's the nightmare."
REVIEW & # 39; FRAME & # 39; 2.0
The Chicago Conference is the central event of a series of meetings and research groups gathered throughout the year by Fed President Jerome Powell, who said he wants to take advantage of the growth of the economy to examine how the Fed is trying to achieve its twin goals of stability and maximum employment. prices.
This is a technical review of the Fed's operational "framework", bringing together many economists and policy experts who have often contributed to major Fed events.
The focus is focused on whether the Fed should make its 2% inflation target a goal to be achieved on average.
This would mean tolerating high inflation long enough to compensate for years of low price increases, leaving interest rates lower than would otherwise be the case, and maintaining such a low unemployment rate.
In fact, it is an effort to refine the work started over ten years ago by former Fed Chairman Ben Bernanke, who advocated a monetary policy that worked better if central banks publicly committed to achieving a specific inflation target. This commitment, if based on coherent policy decisions, would shape public expectations and choices and help produce the desired level of inflation.
This led the Fed Bernanke to adopt in 2012 a "flexible targeting of inflation" with a target of official inflation of 2%.
AN INFLATION MAKE-UP STRATEGY
The years that followed were not favorable to Bernanke's setting.
Inflation, growth and interest rates were stalled at a slower pace, a "new normal" that challenged policymakers' expectations that inflation would pick up following their stimulus efforts, including buying billions of dollars in bonds.
The Fed's key rate has also been stuck: it is currently in a range of 2.25% to 2.5% and is not expected to increase. This figure is lower than historical averages, which leaves less room for the Fed to support the economy by lowering rates before reaching the lower zero and eliminating bond purchases and the like. tactics used to fight the 2007-2009 recession.
The goal of a "catch-up" strategy for inflation, considered risky and untested by the world's major economies, would be to raise inflation expectations, offering all the benefits expected by Bernanke .
For some, it is an effort to better implement what the Fed could already do if it took its current target of 2% more seriously.
Under Bernanke, some officials feared that if the Fed specified an inflation target without defining "maximum employment", their preference would be to control inflation and, inevitably, to be lower than l & # 39; goal. The wording agreed at the time was intended to create what officials call a "big tent" appealing to decision makers concerned about high inflation and those worried about high unemployment, thus allowing for consensus.
It may have been too big.
"The problem is that the Fed has not pursued its goal with the aggressiveness that we might want to see," said the former Fed chairman at Minneapolis, Narayana Kocherlakota, who was opposed to rising rates at some of its last meetings as no apparent inflationary pressure had manifested itself.
FULL EMPLOYMENT?
Indeed, the last two years have pushed even the most responsive inflation managers to rethink.
Unemployment has fallen much further than expected by policymakers without signs of rising prices, evidence that some fundamental dynamics of the economy have changed.
For some, including Fed Vice President Richard Clarida, this suggests that the Fed might perhaps be leaning more heavily towards its maximum employment goal by fearing less inflation.
Two of the seven Chicago panels will examine what maximum employment means, a possible sign that the Fed could recognize: much higher employment levels could now be possible before inflation is triggered .
Any decision will probably be made next year, perhaps in January, when the Fed releases its annual report on the long-term goals and strategy.
"This is not a purely intellectual exercise," said Andrew Levin, professor of economics at Dartmouth. "The Fed should not be satisfied with the evolution of the last 10 years".
"It was a long, slow, painful recovery, and since it was difficult for many American families, you should not be content to do the same thing again."
(Howard Schneider Report, edited by Dan Burns and Andrea Ricci)
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