"BOSTON (Dow Jones)--As part of a broader attempt to help stimulate economic activity, the Federal Reserve may have to allow inflation to overshoot levels consistent with price stability, a U.S. central bank official said Saturday.
"The U.S. economy is best described as being in a bona fide liquidity trap" and given the challenges now faced by the nation, "much more policy accommodation is appropriate today," Federal Reserve Bank of Chicago President Charles Evans said. His comments came from the text of a speech prepared for delivery before a conference on monetary policy held by the Boston Fed.
As the Fed seeks to do more--Evans did not tackle his preferred path of primary stimulus--it could gain extra bang for the buck by changing its longer-run inflation goal. The official said while it would be a policy that must be communicated with clarity, the Fed may be able to get overly low levels of inflation back to something more acceptable by saying above-target inflation will be tolerated for a time.
Evans said this regime, which he called price-level targeting, "would be a helpful complement to our current and prospective strategies in the U.S." The official added, "there are quite a number of academic studies of liquidity trap crises that find either price-level targeting or temporary above-average inflation to be nearly optimal policies."
But he noted resistance to the idea would potentially be significant: "central bankers and the public generally loathe the idea that even a temporarily higher inflation rate could be beneficial or be consistent with price stability over the longer term." He noted that it was an idea he had initially opposed before beginning to see its utility. Fed chief Ben Bernanke did not mention the idea in his speech Friday outlining the likely path of Fed stimulus, and past comments suggest he would oppose Evans's idea.
And yet, the central bank may need to act. "If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call," Evans said.
http://online.wsj.com/article/BT-CO-20101016-700971.html
"The U.S. economy is best described as being in a bona fide liquidity trap" and given the challenges now faced by the nation, "much more policy accommodation is appropriate today," Federal Reserve Bank of Chicago President Charles Evans said. His comments came from the text of a speech prepared for delivery before a conference on monetary policy held by the Boston Fed.
As the Fed seeks to do more--Evans did not tackle his preferred path of primary stimulus--it could gain extra bang for the buck by changing its longer-run inflation goal. The official said while it would be a policy that must be communicated with clarity, the Fed may be able to get overly low levels of inflation back to something more acceptable by saying above-target inflation will be tolerated for a time.
Evans said this regime, which he called price-level targeting, "would be a helpful complement to our current and prospective strategies in the U.S." The official added, "there are quite a number of academic studies of liquidity trap crises that find either price-level targeting or temporary above-average inflation to be nearly optimal policies."
But he noted resistance to the idea would potentially be significant: "central bankers and the public generally loathe the idea that even a temporarily higher inflation rate could be beneficial or be consistent with price stability over the longer term." He noted that it was an idea he had initially opposed before beginning to see its utility. Fed chief Ben Bernanke did not mention the idea in his speech Friday outlining the likely path of Fed stimulus, and past comments suggest he would oppose Evans's idea.
And yet, the central bank may need to act. "If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call," Evans said.
http://online.wsj.com/article/BT-CO-20101016-700971.html
