Former Federal Reserve Chairman Ben Bernanke predicted that the central bank’s new leadership will study alternate regimes for monetary policy over the next year to 18 months.
“There will be some pretty serious discussions” on policy frameworks at the Fed under the chairmanship of Jerome Powell, Bernanke said Monday. He said Powell is likely to assign a subcommittee of officials to study the subject. “I imagine this will come up for serious debate in the next year to 18 months.”
Bernanke made the comments on a panel with San Francisco Fed President John Williams at the Brookings Institution in Washington on whether the central bank should keep its 2 percent inflation target or rethink it. Williams advocated a price-level target, while other scholars on the panel argued in favor of a nominal target for gross domestic product.
The Fed says its 2 percent inflation goal is symmetrical. That means policy makers are equally unhappy if they miss by undershooting or overshooting. Still, they don’t try to make up lost ground by running inflation above target if they’ve been under the goal for a prolonged period, as is currently the case. The Fed has undershot its target for most of the past five years.
Price-level targeting aims for an inflation goal on average over a given time period, and Williams has suggested for a while that his colleagues consider switching to such a regime.
“Accountability is absolutely critical,” Williams said on the panel. “Hitting the nominal anchor is the most important part of monetary policy,” whichever anchor that may be.
Under nominal GDP targeting, the central bank could pick a nominal growth path for total spending and investment in the economy.
U.S. central bankers are already discussing alternative regimes in public and at their policy meetings. One reason is that the so-called neutral interest rate, or the policy rate that keeps supply and demand in balance, is low, putting the Fed at risk of hitting the zero boundary on policy in the next recession. The Fed in December estimated the longer-run median estimate for the federal funds rate at just 2.8 percent.
Williams added that the issue of low neutral rates applies “to all advanced economies.”