The Federal Reserve is headed for a major debate over the next 18 months about changing its 2 percent inflation target to allow for more stimulus to battle the next recession, former Fed Chairman Ben Bernanke predicted Monday.
Speaking at an event at the Brookings Institution, where he is a scholar, Bernanke suggested that Trump Fed chairman nominee Jerome Powell is likely to formally begin re-examining the Fed’s target this year and that there “there will be some pretty serious discussions” on changing it in 2019.
Bernanke’s comments are the latest sign that the Fed is moving toward a historic reassessment of its monetary policy.
Last week, minutes from the central bank’s December monetary policy meeting revealed that a few unnamed officials want the Fed to study alternatives that would allow for much greater monetary easing in the case of another recession.
The fear within the central bank is that, with short-term interest rates still low by historical standards, they might be limited in their ability to cut rates before lowering them to zero in the case of another downturn. Traditionally, rate cuts have been the Fed’s top tool for counteracting economic slowdowns. From 2008 to 2015, however, the Fed was faced with the prospect of trying to conduct monetary policy with its target set at zero.
At Monday’s event, Federal Reserve Bank of San Francisco President John Williams said the Fed should make the change now, with unemployment low, rather than waiting for another crisis to make a switch. “The right timing of this debate is really now,” he said.
In his remarks, Williams also made a case for leaving the Fed’s inflation target for a price level target, a goal that would require the central bank to pursue catch-up inflation if it missed its target one year. "It’s not nearly as scary as you might think,” he said.
In slides prepared for the same event, Boston Fed President Eric Rosengren called for regular reviews of the Fed’s framework for setting monetary policy and suggested that he would favor an inflation “range” rather than a specific rate.
