Federal Reserve officials should be cautious as they weigh whether a switch in their inflation target is appropriate, Chicago Fed President Charles Evans said March 9.
Those discussions, though still at an early stage, have become more important in recent months as the Fed thinks about ways to tackle the next recession. Fed officials discussed the issue at the January meeting of the Federal Open Market Committee, according to minutes of the meeting. Fed Chairman Jerome Powell's two predecessors have weighed the merits of moving away from the explicit 2% inflation target set in 2012.
At a New York City event, Evans said today's strong economic picture makes it "a good time to take a hard look" at whether the Fed should rethink its monetary policy framework. Policymakers, he said at a Shadow Open Market Committee event, will likely "face more difficult monetary policy challenges when the next downturn occurs." That is partly because normal interest rates appear to be substantially lower than they were before the crisis, giving the Fed much less room to cut rates in an effort to boost the economy during the next recession.
Economists, along with some current and former Fed officials, have floated several options that the Fed could look at as those discussions proceed. Those include raising the 2% target to a higher amount, perhaps 3% or 4%, as well as an option that would let the Fed compensate for past inflation misses later on.
Generally, Evans said, those options imply that the Fed would let inflation figures come in higher, either permanently if the target is raised, or temporarily as the Fed looks to make up for recent inflation misses. Inflation has continually come in below the Fed's 2% goal since it was established in 2012.
Evans declined to endorse a specific alternative, instead emphasizing that the Fed needs to think about how the general public might react to rising prices. It also must consider the implications the change could have on financial stability, he said.
He also said the Fed should give "strong consideration" to sticking with its current framework, though he added that the central bank must also ensure it is working as effectively as possible.
The Fed, he said, would likely have more discretion under its current approach to adjust to economic conditions than it would under some of the more rule-based approaches others have floated. And that discretion, he said, is important for the Fed as it looks to accomplish its dual mandate of low unemployment and price stability.
