According to a central banker, this is the best time to find the best means to tackle the next downturn as the economy of the United States is getting stronger with the inflation level getting close to the two percent target of the Federal Reserve, as the steady rate increases of the Fed is likely to have subtle impact on growth in the latter part of the coming year. In his address prepared to be delivered in London, the Chicago Federal Reserve Bank President, Charles Evans confirmed that there is a need to make plans ahead of time. It has been confirmed that fundamental changes in the economy since the outbreak of the financial crisis suggests that there is no need for the rates to be increased to their previous points in order to have a braking impact on the economy.
This is a sign that there will not be enough room to reduce the interest rates to ensure the stimulation of the economy when the next downturn happens, and the Fed might be compelled to apply controversial devices such as bond purchase to drive growth. According to Evans, he said that this is the best time to take a critical look at whether and how the strategic monetary policy framework of the Fed could be altered to tackle these problems. The Fed has been faced with immense pressure to provide a new policy framework as it started the process of increasing rates. The Fed Chair, Jerome Powell has continually avoided public debate sittings in a bid to evade questions regarding what could happen next, and it is not clear if he will be disposed to an idea of re-strategizing policy.
On Wednesday, Evans highlighted some possibilities such as increasing the inflation target to four percent or applying price-level targeting; a strategy which the central bank permits the inflation level to increase beyond the target for extended time during a recovery to compensate for the long periods of below-target inflation during a recession. However, he said the application of the strategy could cause trouble in reality as the public has low tolerance for high inflation.
Evans opined that in a bid to achieve our maximum employment and inflation targets, it might need some long periods of strong monetary policy accommodation which could be inimical to financial stability. He said it is crucial to ensure these factors are considered in the assessment of a new framework.
On a final note, the Fed should also keep its present framework in one piece, as it is better to keep strengthening it with small modifications rather than changing it. Evans said there is a need to remember that the major benchmark is the ability to ensure the mandated policy goals are delivered, especially when we are faced with the scenario of staying with our present framework or changing it.
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