A posse of Federal Reserve policy makers met with skepticism last week when they described ways to potentially improve their management of the economy.
Participants at a Hoover Institution monetary conference questioned whether the central bankers have the will or the way to implement the fresh strategies they outlined, including average inflation targeting. The experts also voiced concern that the U.S. may be left vulnerable to a potentially deep and prolonged economic downturn.
“It seems very fragile,’’ former Fed adviser Andrew Levin said Friday of proposals made during a panel discussion by Fed regional bank presidents from Cleveland, Dallas, St. Louis and San Francisco. “I lose sleep worrying’’ that the economy is dependent on such shaky strategies, the Dartmouth College professor added.
The conference took place against the backdrop of an in-depth framework review by the Fed of its policies and practices that officials say will wrap up in the first half of 2020.
At the top of the agenda: how to conduct monetary policy at a time of low interest rates and low inflation. That’s a world where the central bank has limited firepower to fight a recession, and where the risk of a deflationary decline in the economy is heightened as a result.
While Fed Chairman Jerome Powell has ruled out increasing the central bank’s 2 percent inflation objective as part of the review, he’s raised the possibility that it could adopt a “make-up’’ strategy -- letting price increases run above target during good times like now, to offset the periods of slower price rises.
Perhaps the simplest version of that would be an average inflation target, with a mean of 2 percent over the entire economic cycle. New York Fed President John Williams and San Francisco Fed chief Mary Daly featured that approach in their presentations to the conference. The pair worked together when he ran the San Francisco bank prior to moving to New York.
The review may not necessarily end up delivering any changes. Daly said repeatedly that the bar was high to implementing an overhaul given all the uncertainties involved.
For instance, some conference participants wondered whether policy makers would be able to deliver on promises to make up for shortfalls or overshoots in inflation.
“It would be a very hard thing to do,’’ said John Cochrane, a senior fellow at Stanford University’s Hoover Institution. A Fed chair would have to tell Congress he or she was pursuing an inflationary policy that might not be best for the economy at that time, simply to make good on a pledge made in the past to act that way.