Clarida, the Fed, said the central bank could adopt a strategy of "makeup" after under-inflation

Bloomberg

The vice president of the Federal Reserve on Friday announced the possibility that the central bank let inflation exceed targets if prices had risen too slowly.

Richard Clarida, vice president of the Fed and senior economist, outlined the possible strategy for inflation, describing the communication review undertaken by the central bank.

At a conference on monetary policy sponsored by the Booth School of Business at the University of Chicago, Clarida compared what comes down to the current strategy – dealing with persistent deficits in 2% target inflation as " "strategies" to target multi-year average inflation or target price levels.

Inflation as measured by the Fed's preferred price indicator has rarely exceeded the 2% target since the end of the financial crisis.

Clarida is not the first Fed chief to suggest such a strategy – New York Fed President John Williams, for example, is a proponent of price-level targeting – but his position lends weight to comments although he has not officially approved them.

Clarida pointed out that the benefits of a makeup strategy would depend on whether households and businesses thought they would be delivered when the time came. "So, one of the most difficult questions is whether the Fed could actually take advantage of possible make-up strategies in the models," he said.

At the conference, Wall Street economists asked Fed officials whether the central bank could even exceed its inflation target if it adopted this strategy.

Joachim Fels, global economic advisor to bond giant Pimco, said the Bank of Japan had a "zero" success in trying to raise the inflation rate above its target.

"How to convince the general public that inflation will increase," he said.

In response, Fed Chairman in New York, John Williams, responded that he saw no reason why an average inflation targeting approach would not work.

The Fed would need a "coherent strategy" and a policy to implement this strategy, he said.

Clarida added that the Fed was looking to expand its toolbox. For example, he said, the Fed could take a page from the specifications of the Bank of Japan and set a temporary cap for longer-dated Treasury yields by standing ready to buy them.

"During the crisis and its aftermath, the US Federal Reserve examined, but eventually found this tool and some other used by foreign central banks eager to the alternatives it had envisioned. But the review will review arguments for these and other tools in light of the more recent experience of other countries, "he said.

Finally, the Fed will look into ways to improve communication on its policy framework and implementation. He suggested "there could be ways to improve communication regarding the coordination of policy tools or the interaction between monetary policy and financial stability."

The first "Fed Listens" style public meeting will be held in Dallas on Monday and the Fed regional banks will hold events throughout the year. There will also be a conference in Chicago in June with speakers and panelists outside the Fed. The Fed plans to share its findings in the first half of 2020.

Clarida said that such an examination made sense now because the US economy was reaching or was close to its maximum goals in terms of employment and price stability. He added that the global decline in neutral interest rate, or star R, is expected to last many years.

In the middle of the session, the Dow Jones Industrial Average

DJIA, + 0.70%

was up about 200 points. The yield on the 2-year note

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, sensitive to the Fed's interest rate expectations, fell by 3 basis points.