MNI ANALYSIS:Fed's Bostic to Propose Price-Level Target Scheme

--SF Fed's Williams, ex-Chair Bernanke Also Advocates Price-Level Target

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of Atlanta President Raphael Bostic

said in a blog post Monday he plans to propose a "potentially useful model for

implementing a price-level targeting scheme in practice" Wednesday, furthering

an ongoing debate inside the Fed over rethinking its 2% inflation target. 

     By backing such a proposal, Bostic would join San Francisco Fed President

John Williams and former Fed Chair Ben Bernanke in support of the alternative

monetary framework in which the Fed tries to keep the level of prices on a

steady 2% growth path and make up for periods of shortfalls by allowing prices

to rise faster so as to stay on the longer run price level path.

     Such a framework would also mark a departure from the Fed's current

operating strategy, which Chair Jay Powell reiterated last week as "always

pushing toward 2%." 

     The Fed is just as concerned with "sustained or persistent deviations of

inflation either above or below" target, the chair said. Even following five

years of undershooting the target, there is no "exact number" on the type of

overshoot the Fed would tolerate or for how long.  

     Historically low neutral rates create a challenge for Fed policymakers,

particularly in the case of a downturn, Bostic said. According to the latest

projections for the long-run federal funds rate reported in the Summary of

Economic Projections, officials estimate the neutral rate to be in a range 2.3%

to 3.0%, compared to a 4% to 5% range in the 1990s.

     That leaves little room to cut rates in a "run-of-the-mill downturn,"

Bostic said. 

     Because the downward drift in the neutral rate is attributable to a falling

real rate of interest, something out of central bankers' control, "we must

necessarily accept that raising the neutral rate, thus affording monetary

policymakers the desired rate-cutting scope when needed, would require raising

the long-run inflation rate," Bostic reasoned.  

     But that is not the only option and may not be the best option, he said. 

     He is "attracted" to another proposed option, that of price-level

targeting, he said, adding he would explain in more detail in upcoming blog

posts. 

     Analysts do not expect the Fed to take any near-term action to change its

policy framework. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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