MNI POLICY: Fed's Daly: Embrace Idea of Above-Target Inflation

By Greg Quinn

     Central banks need to get comfortable using a bigger toolkit to boost

inflation in a slow-growth world and should "embrace" inflation that's slightly

above target, Federal Reserve Bank of San Francisco President Mary Daly said

Monday.

     "We have the tools we need. Options like average inflation targeting,

nominal income targeting, and boosting the inflation target are already being

researched and widely debated," Daly said in the text of a speech she's giving

in Dublin.

     "We've exercised the muscle of pushing inflation down for so long that

changing direction feels unnatural," she said. "But that is exactly what we will

need to do. We need to embrace the mindset that inflation a bit above target is

far better than inflation a bit below target in today's economic environment."

     The speech didn't give a direct near-term outlook for the Fed's policy rate

or mention any recent changes in global risks such as the coronavirus outbreak

or recent U.S. trade deals. The Fed cut rates three times last year amid global

risks and policymakers have said the economy is now in a good place and only a

major reversal could trigger more stimulus.

     Most of Daly's speech was about why the Fed and central banks worldwide

have struggled in recent years with slow growth and inflation, and potential

growth hobbled by aging populations. The era of low interest rates means fiscal

policy must play a larger role in boosting growth, she said.

     "Lower inflation, lower inflation expectations, and lower real interest

rates -- add up to one thing: less monetary policy space when the next downturn

emerges," she said. "Fiscal policy will need to play a larger role" and programs

such as expanded jobless benefits could be "especially powerful."

     One success has been testing the limits of the job market, an experience

that has refuted traditional economic models that predicted inflation would

accelerate as unemployment approached record lows. 

     "A historically low unemployment rate does not mean that the labor market

is historically tight," she said. 

     "Letting the economy run past what we thought was possible has tremendous

benefits, especially for disadvantaged groups. Eleven years into the expansion,

many more workers have entered the labor force and found jobs than anyone

thought possible."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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