With rates rising, the Fed must plan its next recession, said Evans

LONDON (Reuters) – The US economy is buoyant, with inflation almost backing the Federal Reserve's 2% target and the Fed's gradual rate hikes should begin to dampen growth slightly. By the end of next year, it is time to think about the best way to fight the crisis. next suburb, said Wednesday an American central banker.

"We need to plan ahead," said Charles Evans, chairman of the Chicago Federal Reserve, in a statement prepared for his arrival in London, saying the current recovery was well under way.

The fundamental changes in the economy since the financial crisis have meant that rates will no longer need to rise as much as in the past to dampen the economy.

This means there will be less scope to reduce interest rates to stimulate the economy in the next downturn, and the Fed may be forced to resort to controversial tools such as buying again. bonds to stimulate growth.

"Now is the time to examine thoroughly whether – and how – the Fed's strategic monetary policy framework could be modified to better address these potential challenges," Evans said.

Calls for a new policy framework multiplied as the Fed began raising rates. Fed Chairman Jerome Powell has so far largely escaped public debate over further debate and does not know how much support he will get from rethinking policy approaches.

On Wednesday, Evans raised several opportunities, including increasing the inflation target to 4%, or adopting price-level targeting whereby the central bank allows inflation to surpass the target. for long periods during a recession.

Evans pointed out that such an approach could be problematic in practice, as the public may not tolerate high inflation.

In addition, he noted, "to achieve our maximum employment and inflation targets may require long periods of strong monetary policy", which could pose a risk to financial stability. Such considerations must also be part of the assessment of any new framework, he said.

Finally, the Fed should also consider leaving its current framework intact, added Evans, strengthening it with small modifications instead of replacing it entirely.

"When we determine whether we are maintaining our current framework or whether we are adopting an alternative, we must remember that the key criterion is the ability to achieve the policy objectives prescribed by the central bank," he said.