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Fed meets tough sales on the inflation frame of Reuters

© Reuters. FILE PHOTO: The Federal Reserve building depicted in Washington, DC

By Ann Saphir and Howard Schneider

PALO ALTO, Calif. (Reuters) – Federal Reserve policemen fear that they are poorly equipped to fight the next recession during their current inflation targeting, and this year is well underway in trying to devise new strategies for managing the interest rate in a world of subdued inflation and low borrowing costs.

But for the US central bankers and monetary policy experts who converged in Palo Until Friday to discuss available options, the challenge was clear: not only will it be difficult to settle for a better framework before the next recession, find out how to Explaining it to the public so that it actually works will be a major challenge.

Just to explain their ideas to each other, Fed decision makers and academics at the Hoover Institute's annual conference showed the slide after the slide along with equations, long dots and n Previously indelible charts.

And while most of the doctoral degrees in the audience probably understood the theories, "do I think where people disagree, does the model's assumptions really matter?" Cleveland Fed Bank President Loretta Mester said in an interview on the sidelines of the conference.

In other words, what will really work?

When central bankers around the world reached for unconventional tools such as bond purchases and forward guidance to fight the 2007-2009 financial crisis, they believed they were facing a lifetime.

But a decade at the end of the big recession, it is clear that the Fed has a new economic norm. Without inflation or the interest rate is expected to rise much, even with US unemployment for almost 50 years.

It gives the central bank much less leeway to cut interest rates to stimulate the economy than it has historically had.

So this year, with the US economy on a steady keel, pausing interest rates, and an expansion set to reach record highs this summer, Fed makers find they have some breathing space to figure out how to do politics more effective when the next decline or shock comes together.

Among the Ideas: Commit to Excessive Inflationary Pressures with Periods of Over-Inflation; targeted economic production, rather than inflation directly; and use negative interest rates to force companies to invest and banks should borrow during recessions.


Everyone wants their lawyers to act as shock absorbers to cut economic weakness and shorten setbacks.

Each of them will deviate to a greater or lesser extent from the Fed's current approach, aiming at 2 percent inflation and a loosely defined ideal for full employment.

And everyone will depend critically on households, businesses and financial markets understand the framework and respond accordingly.

Average inflation targeting is the frame selection that has attracted the most support so far. The idea, New York Fed President John Williams (NYSE 🙂 explained, is to aim for inflation to average 2 percent over a given period ̵[ads1]1; say one and a half years.

When inflation falls in periods of economic stress, the central bank will respond by keeping simple policies in place until inflation rises above 2 percent and remains there for some time.

If households and businesses know they can rely on higher inflation in the future, they will borrow and spend more during the recessions, which will theoretically increase the return of the economy to health. But for the plan to work, providers must believe that the Fed will really push inflation higher in the future.

On the other hand, negative prices will stimulate the economy by punishing businesses for not spending money on the economy; If they only keep their money on the bank, they will end up paying for the privilege. However, for such a regime to be accepted, ordinary people would be sure they would not be punished.

Fed makers have largely rejected negative prices, but some central banks have tried it, and academics like Professor Kenneth Rogoff of Harvard University, who presented their work at the Hoover Conference, maintain that it is a viable alternative.

Not everyone at the conference was sold on the benefits of a new framework, not even the Fed makers who presented some of the ideas.

"The bar for change is high," says chief executive chief Mary Daly of the San Francisco Fed. "Making mistakes in this room can be costly."

St. Louis Fed chief James Bullard has long told a framework known as nominal GDP targeting where the Fed would target a certain level of economic output rather than directly.

But even when he gave a new tone to the idea, he expressed trepidation with such a radical change: experimenting with the way the world's largest central bank does business, he said, "freeing up chaos" in global financial markets.

One of the challenges of selling a new framework is that over the past 10 years, central banks globally have failed to deliver their current 2 percent inflation target, the current international standard.

To Cleveland Fed's Master, with a set of rules, whatever they may be, policy can be made more effective by making it easier for people to understand the goals and limits of Fed actions. [19659004] And Fed decision makers in Palo Alto were keen to explore new ideas. The Fed has half a dozen more events around the outline planned for the rest of the year.

Most audiences gave the Fed credit to tackle the problem. Said Dartmouth College Economics Professor Andy Levin, "The Fed needs to find something new."

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