MNI POLICY: Brainard Urges Fed Yield Caps, Avg. Inflation Goal

--Fed Governor Also Touts Forward Guidance Pegged to Meeting Dual Mandate

By Evan Ryser

     WASHINGTON (MNI) - Federal Reserve Governor Lael Brainard Friday called for

an expanded toolkit before the next downturn including yield caps, forward

guidance tied to meeting the dual mandate and targeting average inflation to

make up for past weakness. 

     "With price inflation showing little sensitivity to resource utilization,

policy may have to remain accommodative for a long time to achieve 2 percent

inflation following a period of undershooting," the Fed governor said in

prepared remarks at the 2020 U.S. Monetary Policy Forum. 

     "I prefer flexible inflation averaging that would aim to achieve inflation

outcomes that average 2 percent over time," Brainard said. Formal

average-inflation-targeting rules present communication and "time-inconsistency"

challenges. 

     Forward guidance that commits to refrain from raising rates until the

inflation objective is reached "is vital to ensure our achievement of our

dual-mandate goals with compressed conventional policy space," she said. 

     Brainard amplified her support of yield curve control, a tool when paired

with forward guidance would reinforce each other and "would transmit additional

accommodation through the longer rates that are relevant for households and

business...and more continuous than quantitative asset purchases." 

     "This approach should avoid some of the tantrum dynamics that have led to

premature steepening of the yield curve in several jurisdictions," she said.

     Brainard emphasized that that in a downturn the Fed would have to act early

and decisively. Speaking in New York, she said the policy rate is likely to be

bound by the lower bound more frequently, risking eroding inflation expectations

and actual inflation. Targeting above-target inflation later could make policy

more credible.

     "Following several years when inflation has remained in the range of 1-1/2

to 2 percent, the Committee could target inflation outcomes in a range of 2 to

2-1/2 percent for a period to achieve inflation outcomes of 2 percent, on

average, overall," she said.

     With the new normal and rates lower for longer, Brainard said structural

safeguards should be strengthened to avoid financial imbalances. "The

countercyclical capital buffer, which was not available before the crisis, is

particularly well designed to address financial imbalances over the cycle."

     --FISCAL POLICY

     Echoing recent comments from other Fed officials, Governor Brainard

emphasized that "even with a revamped monetary policy strategy and expanded

tools, there are risks." 

     On top of "a forceful response from monetary policy, robust countercyclical

fiscal policy is vital," she said. "The reduced conventional monetary policy

buffer makes the importance of fiscal support during a downturn even greater

than it has been in the past, and the case for fiscal support is especially

compelling in the context of very low long-term interest rates." 

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

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