MNI POLICY: Fed To Consider Price-Level Targeting, Powell Says

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve will give careful consideration to a

price-level targeting framework as a way to make its 2% inflation target "highly

credible," Chair Jay Powell told Congress on Tuesday. 

     The framework would allow inflation to rise above 2% in good times to make

up for lower inflation in other times. 

     Real and nominal interest rates have fallen over the last 40 years, Powell

noted. "In a typical downturn, odds are much higher that we'll wind up at the

zero lower bound again," leaving the Fed with fewer tools to prop up the

economy.

     If inflation languishes below 2% for a long time, it could drag down

inflation expectations, now believed to be the most important driver of actual

inflation, Powell said.

     Therefore the Fed owes the public "careful consideration" of alternate

schemes of inflation "so that inflation averages around 2% rather than only

averaging 2% in good times and then averaging way less than that in bad times,

which would drag expectations down," he said. 

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

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