INSUBCONTINENT EXCLUSIVE:
SAN DIEGO: The Federal Reserve could find itself fighting too-low inflation for years to come, San Francisco Federal Reserve President Mary
Daly said on Friday, and may need a new policy framework to lift inflation back up to the Fed’s 2 per cent goal.
“We don’t have a
really good understanding of why it’s been so difficult to get inflation back up,” Daly said at the annual American Economics
Association meeting in San Diego.
But with global growth slowing and the populations of most advanced economies aging, Daly said, “this
new ‘fighting inflation from below’ is going to be with us, I would argue, for a longer period of time than just a few years.”
As a
result, she said, “a new policy framework will likely be required” to boost inflation.
Daly and her fellow policymakers are in the midst
of a year-plus review of possible new approaches, including one in which the Fed would encourage too-high inflation to make up for periods
Early indications are that any changes will likely be modest.
The Fed expects to release the results of its review in mid-2020.
The Fed
lowered US interest rates three times last year, to a target range between 1.5 per cent and 1.75 per cent, in part to keep inflation from
sinking amid rising global economic headwinds.
Now that at least some of those factors, including US-China trade tensions, have eased a bit,
policymakers say they will keep rates where they are, barring a material change in the economic outlook.
Sluggish inflation gives the Fed
room to keep interest rates low and probe how far down it can push unemployment, now near a 50-year low and well below what economists have
long estimated should represent a fully employed American workforce, Daly said.
“It’s a great benefit that you can let the economy run a
little bit more and you can actually see what full employment looks like,” Daly said.
But at the same time, low inflation poses a
“We are seeing some early evidence that long run inflation expectations are slipping.”