MNI POLICY: Brainard: Partial To Yield Caps, Flexible PCE Goal

--Fed. Gov. Watching For Material Shift That Could Alter Appropriate Policy Path

By Evan Ryser

     WASHINGTON (MNI) - Federal Reserve Governor Lael Brainard indicated a

December interest-rate pause while also saying she likes flexible inflation

averaging and yield curve control amid the Fed's monetary policy strategy

review.

     Brainard said in a speech Tuesday she prefers "a more flexible approach

that would anchor inflation expectations at 2 percent by achieving inflation

outcomes that average 2 percent over time or over the cycle." The decline in the

neutral rate, low trend inflation and low sensitivity of inflation to slack all

mean there is a greater possibility the policy rate will hit the effective lower

bound, she said.

     The Fed's framework review of its monetary policy strategy, tools, and

communications will extend into 2020 and no conclusions have been reached at

this time, said Brainard, adding the views she gave were hers alone. 

     "Flexible inflation averaging could bring some of the benefits of a formal

average inflation targeting rule, but it would be simpler to communicate,"

Brainard said in prepared remarks for the New York Association for Business

Economics. 

     Brainard said a successful makeup strategy requires that financial markets,

households, businesses and others understand and believe the Fed will compensate

for past misses. 

     "I suspect policymakers would find communications to be quite challenging

with rigid forms of makeup strategies," Brainard said. 

     Brainard also said controlling the yield curve may be a better way to bring

inflation back to target than tools used in the past. "There may be advantages

to an approach that caps interest rates on Treasury securities at the

short-to-medium range of the maturity spectrum-yield curve caps-in tandem with

forward guidance that conditions liftoff from the ELB on employment and

inflation outcomes," she said.

     Brainard said this approach would be easier to communicate and be less

"lumpy" than the option of quantitative asset purchases. The Fed would be able

to let "caps expire, any securities that were acquired under the program would

roll off organically, unwinding the policy smoothly and predictably," she said. 

     "This is important, as it could potentially avoid some of the tantrum

dynamics that have led to premature steepening at the long end of the yield

curve in several jurisdictions," Brainard said. 

     --CURRENT OUTLOOK AND POLICY 

     Brainard said her outlook is for "continued moderate expansion, a strong

labor market, and inflation moving gradually to our symmetric 2 percent

objective." 

     Brainard will wait to see the full effect of the Fed's three rate cuts this

year. "I will be watching the data carefully for signs of a material change to

the outlook that could prompt me to reassess the appropriate path of policy."

     The economy appears to be growing at a pace modestly above potential over

the next year or so and while business investment remains downbeat there is

little sign that softness in trade, manufacturing and business investment has

spread to consumer spending, she said. 

     Employment remains strong, Brainard said, with the employment-to-population

ratio for prime-age adults moving up to its pre-recession peak. 

     Brainard, however, also pointed to risks, including subdued foreign growth,

noting that Q3 was "weak," with little improvement in Q4. 

     "More broadly, the balance of risks remain to the downside, although there

has been some improvement in risk sentiment in recent weeks," Brainard said,

pointing the risk of a disorderly Brexit and trade. 

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

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