The change in leadership at the U.S. central bank could trigger a policy rethink
As Jerome Powell prepared to take over as chairman of the Federal Reserve on Feb. 5, some of his colleagues were publicly agitating for a radical rethink of the central bank’s playbook for guiding monetary policy. Behind the push for reconsideration of the Fed’s 2 percent inflation target: a fear of running out of monetary ammunition in the next recession.
With interest rates near historically low levels— and likely to remain that way for the foreseeable future—these officials worry the Fed will have little leeway to aid the economy when a downturn inevitably hits. They argue that revamping the inflation objective beforehand could help counteract that. “The most important issue on the table right now is that we need to consider the possibility of a new economic normal that forces us to reevaluate our targets,” Federal Reserve Bank of Philadelphia President Patrick Harker said in a Jan. 5 speech.
Any change in the Fed’s approach would of course have major implications for financial markets and the economy. While Powell has yet to say whether he thinks the topic is worth a deep dive by the Fed, former Chairman Ben Bernanke predicted at a high-powered Brookings Institution conference on Jan. 8 that it would come up for “serious debate” at the central bank in the next year to 18 months. Lawmakers may also want to weigh in, which could complicate any remodeling effort.
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