Fed’s Mester Says Ready to Review Bank’s Operating Strategy

Federal Reserve Bank of Cleveland President Loretta Mester said Friday she’s ready to review the central bank’s operating strategy this year, even as she said the Fed’s current way of conducting policy has worked to deliver a good economic outcome.

“The economic expansion is now firmly in place, labor markets are strong, and inflation is expected to return to 2% on a sustained basis over the next couple of years,” Ms. Mester said in the text of a speech to be delivered at the University of Chicago’s Booth School of Business 2018 U.S. Monetary Policy Forum in New York.

“The economy has returned to normal and monetary policy, including the policy rate and the balance sheet, is normalizing,” she said, adding “the smooth transition to new Fed leadership is also under way.”

When it comes to the Fed and its strategy to achieve its job and inflation goals, “nothing is broken.” Still, “a return to a normal economy and normal policy-making gives us an opportunity to look at some longer-run issues. This suggests to me that it may be appropriate later this year to begin an assessment of our current monetary policy framework and alternatives,” Ms. Mester explained.

In her speech, Ms. Mester didn’t endorse any of the new potential paths the Fed could follow. Right now, the Fed seeks to promote maximum job growth and targets a 2% annual inflation rise, viewing price rises above and below that level as equally undesirable.

The Fed has clearly delivered on its job goal but getting inflation back to 2% has proved more elusive. Some Fed officials now want the central bank to pursue what’s called price-level targeting, which sets a desired path of price increases. If price pressures fall short of that path, Fed policy would act to push prices above the path to get them returned to where they should have been all along.

Ms. Mester said that strategy is on the table, among other variations on that theme. A higher inflation target may also be worth entertaining, she said.

“I remain open-minded on this,” Mr. Mester said. “At the same time, a change from flexible inflation targeting shouldn’t be decided cavalierly, ” she said.
Source: Dow Jones