Federal Reserve Chairman Jerome Powell on Wednesday defended the central bank’s review of long-term policy strategy and said the results would be “meaningful.”
“I’d like for this review to come out with a set of positive results, meaningful improvements,” Powell said at his news conference. The review is set to be completed in the middle of next year.
Some economists are worried that the Fed is only going to tweak its framework, which includes a 2% inflation target.
“This will be evolution, not a revolution,” said Thomas Simons, senior money market economist at Jefferies, in a note to clients prior to the Fed meeting.
Former Minneapolis Fed President Narayana Kocherlakota said it would be “completely absurd” for the Fed to not make major overhauls to its strategy. Kocherlakota noted that inflation has been below the Fed’s 2% target most of the time since it was adopted in 2012.
At its meeting Wednesday, the Fed kept rates steady and signaled it was more upbeat about the outlook
Speculation among Fed watchers has been that the central bank will agree to adopt a “makeup” strategy on inflation. Under that policy, if inflation runs below 2%, the Fed will tolerate inflation running above 2% for an equivalent period.
Joe Gagnon, a former Fed staff member and now a fellow at the Peterson Institute for International Economics, called an average inflation target a relatively “small change” in the Fed’s current practice.
Gagnon and other prominent economists are calling for the Fed to take a bolder step and raise its inflation target closer to 4%.
They argue this would give the Fed room to cut rates in a recession without hitting zero as happened after the financial crisis.
Asked about a 4% inflation target at his news conference, Powell balked.
“If you said we are raising the inflation target to 4%, what would be the effect of that? Where is the credibility in that, really? You haven’t been able to get it to 2%,” he said.
Last month, Chicago Fed President Charles Evans said that some Fed officials get nervous even when inflation goes slightly above 2%.
Investors appear content the Fed will tolerate some inflation overshoot going forward. Yields on the 10-year Treasury note
slipped slightly to 1.8% on Wednesday after Powell’s news conference.
The Fed chairman left open the door that 4% inflation might be considered in future reviews down the road.
“It doesn’t mean [this review] has to solve every problem going forward. These things don’t tend to move in a lurch-y way, they tend to evolve,” he said.
“But, and if we do this, in a few years again and again, things like that, then at least we are moving in a good direction and I think we will be. I’m confident we will be,” Powell added.