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WASHINGTON – Former Federal Reserve Chairman Janet Yellen said that central bank officials should formally adopt a policy they used earlier in the decade and pledge to maintain interest rates longer than they would when
The problem of how to proceed when the Fed lacks room to reduce rates remains a concern for many policymakers, as interest rates are much lower than they were during similar periods of low unemployment and sustained economic growth. The risk is that the Fed has less money to fight a recession.
Ms. Yellen has maintained a low public profile since she left the Fed in February, having served as President for four years, four years as Vice President and six years as President of the San Francisco Fed. She spoke Friday at a conference at the Brookings Institution, where she is a distinguished.
The Fed's benchmark rate is currently between 1.75% and 2%, after being close to zero for years after the 2008 financial crisis.
Several Fed officials have said that the problem of being stuck near the so-called lower limit of zero, where interest rates are close to zero, should prompt the Fed to consider changing its policy by 2%.
Yellen's proposal is less revolutionary and more evolutionary.
While other approaches "deserve to be studied and debated," Ms. Yellen said she sees "considerable inconvenience for each of them."
The approach of committing to "lower interest rates for longer" after going to the lower limit is more practical, Yellen said. It would formalize a policy used by the Fed as Vice President and President.
The Federal Open Market Rate Setting Committee "could explicitly agree that the Committee will set short-term rates" lower than longer "than standard monetary policy rules" when short-term rates have already been reduced. zero, said Ms. Yellen.
One of the advantages of this approach is that it would largely leave in place the Fed's 2% inflation target, which is "well understood" and has "significantly contributed to the good macroeconomic performance in the US She said.
Ms. Yellen said that adopting or formalizing the "weaker for longer" approach before the next recessions would make this type of guidance more credible during a recession.
She said this approach would offset the Fed's inability to reduce rates in the short term by encouraging investors to take more risks, reducing long-term rates, over which the Fed has less direct control. This could also prevent future inflation expectations – which officials see as a crucial factor in the overall evolution of inflation – to decline less rapidly during downturns.
Write to Nick Timiraos at [email protected]
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