FOMC Minutes Excerpt: Discussion On Inflation Make-Up Strategies>

     WASHINGTON (MNI) - The following is an excerpt of the Federal Open 

Market Committee minutes describing committee's policy action, 

published Wednesday for the September meeting: 

     Although ensuring inflation outcomes averaging 2 percent over time 

was seen as important, many par-ticipants noted that the illustrated 

makeup strategies delivered only modest benefits in the staff's model 

simulations.  These modest benefits in part reflected that the 

responsiveness of inflation to resource slack had diminished, making it 

more difficult to provide sufficient accommodation to push inflation 

back to the Committee's objective in a timely manner.  Some participants 

suggested that the modest effects were particularly pronounced using the 

FRB/US model and indicated the need for more robustness analysis of 

simulation results along several dimensions and for further comparison 

to other alternative strategies.  In addition, several participants 

noted that the imple-mentation of the makeup strategies in the form of 

either average inflation targeting or price-level target-ing in the 

simulations was tied too rigidly to the details of particular rules.  An 

advantage of the current framework over such alternative approaches is 

that it has provided the Committee with the flexibility to assess a 

broad range of factors and information in choosing its policy actions, 

and these actions can vary depending on economic circumstances in order 

to best achieve the Committee's dual mandate.  Similarly, makeup 

strategies could be implemented more flexibly in order to deliver more 

accommodation during a future downturn and through the subsequent 

recovery than what could be achieved with a mechanical makeup rule.  

     Participants also discussed a number of challenges associated with 

makeup strategies.  Many participants expressed reservations with the 

makeup strategies analyzed by the staff.  Some participants raised the 

concern that the effective use of the makeup strategies in the form of 

the average inflation targeting and price-level targeting rules that the 

staff presented de-pended on future policymakers following through on 

commitments to keep policy accommodative for a long time.  Such 

commitments might be difficult for future policymakers to follow through 

on, especially in situations in which the labor market was strong and 

inflation was above target.  A few participants acknowledged that 

credibly committing to makeup strategies posed challenges.  However, 

they pointed to the commitments that central banks around the world made 

to inflation targeting as examples in which simi-lar challenges had been 

overcome.  A couple of par-ticipants raised the concern that keeping 

policy rates low for a long time could lead to excessive risk-taking in 

financial markets and threaten financial stability.  However, a couple 

of other participants judged that macroprudential tools could be used to 

help ensure that any overleveraging of households and firms did not 

threaten the financial system, while monetary poli-cy needed to be 

focused on achieving maximum em-ployment and symmetric 2 percent 

inflation.  A few participants viewed the communication challenges 

associated with average-inflation targeting strategies, including the 

difficulty of conveying the dangers of low inflation to the public, as 

greater than for some other strategies that use threshold-based forward 

guidance.  Several participants noted that makeup strategies could 

unduly limit the policy response in situations in which inflation had 

been running above 2 percent amid signs of an impending economic 

downturn.  Accordingly, these participants favored makeup strategies 

that only reversed past inflation shortfalls relative to makeup 

strategies that reversed both past inflation shortfalls and past 

overruns. 

     Participants continued to discuss the benefits of the Committee's 

review of the monetary policy frame-work as well as the Committee's 

Statement on Long-er-Run Goals and Monetary Policy Strategy, which 

articulates the Committee's approach to monetary policy.  As they did at 

their meeting in July, partici-pants mentioned several issues that this 

statement might possibly address.  These issues included the conduct of 

monetary policy in the presence of the ELB constraint, the role of 

inflation expectations in the Committee's pursuit of its inflation goal, 

the best means of conveying the Committee's balanced ap-proach to 

monetary policy, the symmetry of its infla-tion goal, and the time frame 

over which the Com-mittee aimed to achieve it.  Participants expected 

that they would continue their deliberations on these and other topics 

pertinent to the review at upcoming meetings.  They also generally 

agreed that the Com-mittee's consideration of possible modifications to 

its policy strategy, tools, and communication practices would take some 

time, and that the process would be careful, deliberate, and patient.  

--MNI Washington Bureau; tel: +1 202-371-2121; email: 

jean.yung@marketnews.com 

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