The US Federal Reserve will have to deal with a delicate balancing act if it opts for a more relaxed view of inflation, according to a former Federal Reserve governor.
It comes as market participants look ahead to the final meeting minutes of the Fed, amid intense speculation the central bank could soon make an official commitment to increase inflation.
A move to take an average inflation target would see the Fed target to push inflation above the usual target of 2% for a while to make the years back that it is below these levels.
The minutes of the Federal Open Market Committee meeting for July will be released at 2 p.m.
“This is the very interesting challenge they have with thinking about their strategy,” Randall Kroszner, who served as governor of the Federal Reserve from 2006 to 2009, told CNBC’s “Street Signs Europe” on Wednesday.
“Traditionally, the Fed has said, ‘Well, we have a 2% target and if inflation starts to get close to 2% or above that, we will raise rates, we will tighten.'”
“The alternative strategy is to say, ‘Well, let’s just horizon over the longer term. We’ve been missing our inflation target for a decade … so maybe we can run hot for a while.’ The challenge with that is that it can lead people to say, ‘The Fed is not serious about fighting inflation anymore, inflation is going out of control,’ ‘he continued.
“They want to try to give the guidance that they really want inflation to rise and be raised above 2% to make it so long below 2%. But, they do not want to go that far to get people to think: ‘Oh my goodness, the Fed has forgotten to worry about inflation and we can see that inflation goes to 3% or 4%.’ “
“I think that’s the big challenge for the line … In the short term, it’s more of a threat of deflation than very low inflation instead of high inflation,” Kroszner said.
‘As long as it lasts’
The minutes are expected to shed more light on the central bank’s consultation process, as it appears to be raising the world’s largest economy in the wake of the pandemic.
The Fed and other central banks around the world have been trying to boost consumer prices for years under the reason that a low level of price appreciation is healthy for a growing economy.
They also worry that low inflation is a problem that feeds on itself, keeping interest rates at historically low levels and giving policymakers little room to reduce monetary policy in the event of an economic downturn.
Federal Reserve Chairman Jerome Powell, wearing a face mask, testified before the House of Representatives Financial Services Commission during a hearing on Treasury Department oversight and the Federal Reserve’s response to the outbreak of coronavirus (COVID) disease. 19), at Capitol Hill in Washington, USA, June 30, 2020.
Tasos Katopodis | Reuters
Fed Chairman Jerome Powell has vowed to maintain support for the economic recovery, saying last month that the central bank “would do what we can, as long as it lasts.”
Powell also warned that the pace of a rebound appeared to be slowing due to an increase in the number of cases of coronavirus in recent weeks.
The US has recorded by far the highest number of cases of coronavirus and related deaths worldwide.
More than 5.4 million people have contracted Covid-19 in the U.S., with 171,823 deaths, according to data compiled by Johns Hopkins University.
– CN Co’s Jeff Cox contributed to this report.
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