Advertising Read more Washington (AFP) Despite solid growth and continuing job gains, the US economy will see inflation fall even further below the central bank's two percent goal, at least for a time, Federal Reserve Chairman Jerome Powell said Tuesday. That forecast added weight to the Fed's recent announcements that it will be "patient" before making any further changes in the benchmark borrowing rate, a stance Powell re-emphasized in semi-annual testimony before the US Senate Banking Committee. "Recent declines in energy prices will likely push headline inflation further below the... longer-run goal of 2 percent for a time," he said. The US central bank increased the key policy interest rate four times last year but rising uncertainty, especially around the US trade confrontation with China, amplified concerns about slowing global growth and fears the Fed was moving too aggressively. And with no sign of rising inflation, that prompted the Fed to signal clearly for the past several weeks that it would tread carefully. Many economists now do not expect any increase this year, while a few say the next move could be a cut if the economy slows further. Noting the Fed's preferred annual inflation measure sits at 1.7 percent, Powell said "the extent and timing of any further rate increases would depend on incoming data and the evolving outlook." The danger of having inflation continually below the target is that it saps confidence in the Fed's ability to impact the economy, especially during a slowdown. But the muted inflation pressures and risks on the horizon mean "this is a good time to be patient and watch and wait and see how the situation evolves," he said in response to a question. He remained upbeat about the economic outlook, saying Fed officials "generally expected economic activity to expand at a solid pace, albeit somewhat slower than in 2018, and the job market to remain strong." - Economic 'crosscurrents' - However, "crosscurrents and conflicting signals" pose a potential danger. The "predominant risks... are slowing global growth, particularly China and Europe," which he cautioned "can create headwinds for the United States economy." Brexit and ongoing trade negotiations also are issues the Fed "will carefully monitor." The United States and China have hammered each other with punitive tariffs on more than $360 billion in two-way trade, raising prices to producers and consumers and undercutting economic growth. The International Monetary Fund cites the trade war between the world's two largest economies as a "major risk" to global growth, and cut their growth forecast for this year. But President Donald Trump on Monday said he expected to hold a "signing summit" soon with China's leader Xi Jinping to resolve the issue and he pushed back a March 1 deadline which would have triggered tariffs to more than double on $200 billion in Chinese exports. In the US economy, low inflation and sluggish wage growth -- despite net job gains that averaged 223,000 last year and GDP gaining just under three percent -- has continued to baffle economists and the Fed. Powell noted some signs of stronger wage growth, particularly in lower-skilled jobs, but also said "disparities persist" in the labor market along racial and ethnic lines, and also between rural and urban workers. - 'They did it anyway' - However, longer-run trends, "such as relatively stagnant incomes for many families and a lack of upward economic mobility among people with lower incomes, also remain important challenges," he said. And the United States has a lower share of prime-age workers participating in the economy than comparable advanced economies, which has the effect of holding back productivity, which is needed to boost growth, he added. Powell said in addition to programs to promote worker training, and dealing with the opioid crisis that keeps people out of the workforce, the government needs policies that do not punish people for going back to work. Describing a training program for in West Virginia, where the women who participated lost "the meager benefits they were already getting" because many US aid programs end as soon as the recipient finds a job. "They had to take a pay cut to go back to work and they did it anyway, which is pretty inspiring," Powell told the Senators. © 2019 AFP<doc-sep>Federal Reserve officials are considering whether to allow inflation to rise above their 2% target more often as they grapple with the likelihood that interest rates are likely to remain much lower than in the past. The discussions are preliminary but are heating up now because the Fed formally kicks off a monthslong review of its policy framework with a national listening tour beginning this week in Texas. Animating the review is the uncomfortable prospect that the Fed’s benchmark short-term rate could peak at or slightly above the current range between 2.25% and 2.5%. Such low rates leave the Fed less room than in the past to cut rates in a downturn and increase the possibility they might be pinned near zero for longer in future recessions. In each of the last three downturns, the Fed lowered its benchmark by roughly 5 percentage points. Low nominal rates leave the Fed with less room to ease in a downturn and increase the possibility rates might return to near zero in the next recession. A policy framework that is more relaxed about higher inflation would be one way to signal the Fed’s commitment to taking bolder action to boost growth after a recession. “It’s a good discussion—to think about how we have policy space, particularly if interest rates through this cycle are not going to be much higher than they already are,” said Boston Fed President Eric Rosengren in an interview earlier this month. Fed Chairman Jerome Powell could be questioned about the review when he testifies on Capitol Hill Tuesday and Wednesday. Fed officials have said they could employ the unconventional stimulus tools they used after the 2008 crisis, including bond-buying programs. But some, including Fed Vice Chairman Richard Clarida, who is heading the review, have expressed misgivings about the programs’ effectiveness. The Federal Reserve held its benchmark interest rate steady Wednesday and delivered its strongest signal to date that the central bank may have reached the end of its latest series of interest-rate increases. Nick Timiraos explains. Photo: Getty When central banks were first setting inflation targets in the 1990s, they were worried about inflation running too high and sought to establish expectations—for both business and consumers—that future inflation would be tame. Behind this approach was the belief that expectations play an important role driving actual inflation. The Fed established a 2% inflation target in 2012, but inflation has run below that target for much of the recent expansion. Fed officials have defined this target as symmetric, meaning they would tolerate inflation running modestly above or below it. A measure of inflation that excludes volatile food and energy categories has averaged 1.6% since the target was adopted in 2012, though it has been running recently at 1.9%. The risk that Americans could start expecting inflation to languish below 2% “calls for a reassessment of the dominant inflation-targeting framework,” New York Fed President John Williams said Friday at a conference in New York. The Fed isn’t looking to raise the 2% target as part of its review, Mr. Powell said in December. Rather, “we are looking for better ways to achieve the inflation goal, for example, on a symmetric basis,” he said. Changes in how the central bank defines its target could boost the power of monetary policy in a downturn, said Mr. Rosengren. “You can have the exact same inflation target, but…how you measure it [can] give you more space,” said Mr. Rosengren. Right now, the Fed isn’t very specific about how it sets the target, he said. “Is it backward looking? Is it forward looking? Is it over a long period? Is it over a short period?” With the current target, the Fed aims for 2% inflation every year, no matter what happened the year before—a “let bygones be bygones” approach. A couple of alternatives are getting a serious look. The first, a price-level target, would call for the Fed to react to what happened before. If inflation undershot 2% one year, the Fed would try to catch up by allowing an overshoot in the next. Former Fed Chairman Ben Bernanke has proposed a modified version of a price-level target that would be used only after periods in which the Fed cut interest rates to zero. By switching to a price-level target in such episodes, the Fed would be essentially promising to keep rates lower for longer to ward off deflationary expectations. The second approach, called an average inflation target, would be a hybrid of a price-level target and the current framework. It would target 2% inflation “on average” over the business cycle, meaning inflation would need to be a bit higher than 2% during good times to make up for an expected shortfall during downturns. Mr. Williams, a leading advocate of the second approach, offered a simple example in a speech last fall. Imagine the central bank succeeds at keeping inflation at 2% during periods when the economy is expanding and interest rates aren’t constrained by being at zero. But 20% of the time, when the economy is in recession and interest rates have been cut to zero, inflation averages 1%. The result is that inflation over the cycle averages 1.8%, below the desired 2% target. In turn, this pulls down expectations of future inflation, which makes monetary policy even less effective. In this environment, “monetary policy is always swimming upstream, fighting a current of too-low inflation expectations,” said Mr. Williams. “It doesn’t sound like much of a change, but it is an important one because you’re no longer following a ‘bygones’ policy,” said William Dudley, who was New York Fed president from 2009 until last June. “If you miss below the 2% target, you’re going to try to make it up, and the Fed has not really said that up to now.” An average inflation target could be more appealing than a price-level target because it would be easier to communicate. “It accomplishes a good portion of the benefits of the price-level target type of framework with a lot less complexity,” said Mr. Dudley. Others see good reasons to stick with the current approach. It has worked well, said Cleveland Fed President Loretta Mester during a panel in Newark, Del., on Tuesday. “The bar has to be high for making a major change,” she said. Write to Nick Timiraos at nick.timiraos@wsj.com<doc-sep>
The vice chairman of the Federal Reserve on Friday laid out the possibility the central bank will allow inflation to run above target if prices have grown too slowly. Richard Clarida, the vice chairman of the Fed and its highest-ranking economist, laid out the possible inflation strategy as he described the communications review the central bank is undertaking. Speaking at a monetary policy conference sponsored by the University of Chicago Booth School of Business, Clarida contrasted what amounts to the current strategy — treating persistent shortfalls of inflation from the 2% target as “bygones” — to “makeup” strategies, where the Fed could target average inflation over a multiyear period or target price levels. Inflation as measured by the Fed’s preferred PCE price index gauge has rarely been above the 2% target since the end of the financial crisis. Clarida isn’t the first Fed official to suggest such a strategy — New York Fed President John Williams, for instance, is an advocate of price level targeting — but his position gives the comments heft, even if he didn’t formally endorse them. Clarida pointed out the benefits of a makeup strategy would depend on whether households and firms believed they will be delivered when the time comes. “Thus, one of the most challenging questions is whether the Fed could, in practice, attain the benefits of makeup strategies that are possible in models,” he said. At the conference, Wall Street economists pressed Fed officials on whether the central bank could even achieve an overshoot of its inflation target if it adopted the strategy. Joachim Fels, global economic adviser at bond fund giant Pimco, noted that the Bank of Japan has had “zero” success trying to raise inflation above its target. “How do you convince the general public inflation will go up,” he said. In response, New York Fed President John Williams replied he saw no reason an average inflation targeting approach would not work. The Fed would need “a coherent strategy” and a policy to execute on that strategy, he said. Another question Clarida says the Fed is seeking to answer is whether to expand its tool kit. For instance, he said, the Fed could take a page from the Bank of Japan’s playbook and establish a temporary ceiling for Treasury yields at longer maturities by standing ready to purchase them. “During the crisis and its aftermath, the Federal Reserve reviewed but ultimately found this tool and some others deployed by foreign central banks wanting relative to the alternatives it did pursue. But the review will reassess the case for these and other tools in light of more recent experience in other countries,” he said. Finally, the Fed will ask how the communication of its policy framework and implementation be improved. He suggested “there might be ways to improve communication about the coordination of policy tools or the interplay between monetary policy and financial stability.” The first of the “Fed Listens” town hall style meeting will be on Monday in Dallas, and the regional Fed banks will host events over the course of the year. There also will be a June conference in Chicago with speakers and panelists from outside the Fed. The Fed is planning to share its conclusions in the first half of 2020. Clarida said such a review makes sense now because the U.S. economy is at or close to its maximum employment and price stability goals. He said the global decline in the neutral interest rate, or r-star, is widely expected to persist for years.