04:44 GMT +313 December 2019
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    Federal Reserve Board Governor Lael Brainard at Harvard University in Cambridge, Massachusetts

    Federal Reserve Governor Brainard Calls for Establishing Less Rigid US Inflation Target

    © REUTERS / Brian Snyder
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    WASHINGTON (Sputnik) - The Federal Reserve should shift from its strict 2 percent inflation target to a more elastic regime that allows for freer interest rate adjustments in the next downturn, Federal Reserve Committee on Financial Stability Chairman Lael Brainard said in a speech.

    "I prefer a more flexible approach that would anchor inflation expectations at 2 percent by achieving inflation outcomes that average 2 percent over time or over the cycle", Brainard, who chairs the Federal Reserve Committees on Financial Stability, said in a speech to the New York Association of Business Economics on Tuesday.

    Brainard proposed that the inflation target be stretched out over time, rather than to be achieved in any particular month. She argues that in most cases, the Federal Reserve fell short of the target anyway.

    "It also makes it harder to achieve our 2 percent inflation objective on a sustained basis when inflation expectations have drifted below 2 percent", Brainard said. Under her proposal, if over a five-year period inflation averages 1.5 percent to 2 percent, the Federal Reserve would "target inflation outcomes in a range of, say, 2 percent to 2.5 percent for the subsequent five years", Brainard added.

    The Federal Reserve needs greater flexibility with respect to its policies as the quantitative asset purchase programs used during the 2008-2009 financial crisis "proved to be lumpy both to initiate… and to calibrate over the course of the recovery".

    Brainard added that shifting the Federal Reserve’s inflation target would put the central bank in a position that made it simpler to communicate with markets and not be encumbered by a rigid benchmark.

    The Federal Reserve has cut rates three times in a row between July and October, citing the need to keep US economic growth on target for a record 11th year amid a global slowdown, and to aim for its desired 2 percent inflation.

    2008 financial crisis, inflation, US Federal Reserve, United States
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