Fed Governor Lael Brainard talked about the “new normal in the economy. One feature equilibrium interest rates will likely remain low in the future. That presents a “challenge” for “traditional ways” of conducting monetary policy. There would be “less room to cut interest rates” in recessions, and thus “less room to buffer” the economy using conventional tools. Also, inflation “doesn’t move as much with economy activity and employment” as it has in the past. The “very flat” Phillips curve makes it “more difficult to boost inflation” to target on sustainable basis.
Brainard explored some issues. One idea is so called “average inflation targeting”. That is, Fed would target inflation over a “longer period of time”. Thus, Fed would aim at inflation above target during recovery and expansion phase of a cycle, making up for the short fall during a recession. She warned that “While such approaches sound quite appealing on their face, they have not yet been implemented in practice. There is some skepticism that a central bank would in fact prove able to support above-target inflation over a sustained period without becoming concerned that inflation might accelerate and inflation expectations might rise too high.”
Another idea is that after short-term interest rates hit zero, Fed might turn to targeting “slightly longer-term interest rates”, using its balance sheet. And, similar to make-up policies, such an approach could help communicate publicly how long the Federal Reserve is planning to keep rates low.
Separately, Richmond Federal Reserve president Tom Barkin said “it is hard to have a recession when unemployment is this low and interest rates are this low”. On the economy, he added “I still see us on a pretty strong course”.
