WASHINGTON (Reuters) – After 14 conferences, a couple dozen research papers and presentations and some very dense math, the Federal Reserve’s hunt for a better way to reach its inflation target may boil down to a single word: symmetric.
FILE PHOTO: A screen displays the U.S. Federal Reserve interest rates announcement as traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 18, 2019. REUTERS/Brendan McDermid/File Photo
The word, meant to convey a tolerance for inflation periodically running a bit hot without the Fed rushing to quash it, is emerging as the touchstone of a concerted push to change how an elusive price goal is understood by the public.
The persistent run of U.S. inflation below the central bank’s 2% target for most of the post-financial crisis era has bedeviled Fed officials eager to avoid the anemic growth and even falling prices that plague Japan and Europe.
When they launched a review of the Fed’s monetary policy “framework” a year ago, it was partly to analyze several ambitious but complex ideas for addressing the inflation shortfall. Those ideas involved a formal pledge that interest-rate decisions would be used to “make up” for bouts of weak inflation with fully offsetting periods of higher inflation.
But in recent weeks the four officials steering the review, including Vice Chair Richard Clarida, have downplayed chances for wholesale change when the debate wraps up next year.
A simpler alternative may have already been put into motion: Pledge to keep rates at the current low level until inflation rises, and make clear in any statements or speeches that the Fed will be in no rush to squelch it when it does.
Over the past year Fed Chairman Jerome Powell and policymakers in general have made that point clear, leaning heavily on the word “symmetric” to describe their inflation target.
“Symmetric” was used to describe the inflation target in a January 2017 Fed statement of long-term strategy. At that point it was intended to make clear that 2% was not an upper limit on the pace of price increases, and to counter criticism that the Fed only cared if inflation was too high.
Under Powell, however, the word has become a Fed staple. He used it 31 times in the eight press conferences he has held since last December. It has appeared at least twice in each of the 14 policy statements issued during his chairmanship, save for the first.
By contrast, it never appeared more than once in a statement under former Chair Janet Yellen, and she used the term sparingly in her press conferences.
Presidents of the Fed’s regional banks also use the word frequently and often explain it to mean they would not only tolerate a period of inflation running above 2%, they would see it as a healthy development after years of missing their mark.
Between that shift in language, other public comments, and the minutes of recent meetings, the broad direction of the Fed’s framework review may already be coming into focus: Coax public inflation expectations higher by emphasizing a readiness to let it run above 2% for perhaps an extended period of time.
Fed Governor Lael Brainard has coined another term for it – “opportunistic reflation” – that captures the spirit of some of the more complicated systems debated this year without the same risk, complexity or strict policy commitment. St. Louis Fed President James Bullard has said ideas discussed during the review would be worked into policy “slowly over time” rather than written “in stone.”
NO ‘BOLD INNOVATION’
To some, that spells a lost opportunity after a year of extensive research, detailed discussions with academics and a series of “Fed Listens” sessions with the public.
One motivation for the review is the persistent low level of the Fed’s target policy interest rate, which leaves the central bank little room to cut rates before hitting zero and having to deploy less conventional policies like bond purchases to lift the economy during a downturn.
“I am fearful that they might be on track for only a modest evolution of the current framework,” said David Wilcox, former head of the Fed’s research and statistics division, now at the Peterson Institute for International Economics. “I don’t perceive that they are laying the groundwork for a bold innovation in monetary policy.”
The Fed is not alone in struggling to hit its inflation target, first set publicly in 2012. Japan and Europe have the same problem, and the European Central Bank has the added dilemma that its 2% inflation goal is an explicit ceiling – hardwiring lower expectations into the euro zone economy.
Research suggests there is no easy fix.
Several solutions analyzed this year, which for example would target things like a “price level” or rather than inflation, are considered to hold potential benefits – in theory. [nL2N2371NW] As a practical matter, they are seen as hard to explain and administer, and easy for future central bankers to ignore if conditions change.
Moreover, with rates already so low, any formal “make up” strategy could “necessitate a very extended spell of extreme policy accommodation,” that could raise other risks such as stock market or financial bubbles, Oxford Economics analyst Kathy Bostjancic wrote recently.
What Fed officials perhaps fear most is that households and businesses will become so accustomed to below 2% percent inflation, they will start acting as if it’s the norm.
That’s where all the talking comes in.
Fed officials may be wary of making specific promises, but they have already begun “socializing” the idea that if inflation does rise they may, at least for a while, stand aside.
Reporting by Howard Schneider; Editing by Dan Burns and Cynthia Osterman