By Howard Schneider
WASHINGTON (Reuters) – The U.S. Federal Reserve on Friday announced plans for a May 15-16 meeting and public “Fed Listens” events around the country as part of a review of its long-term strategy and policymaking process.
The so-called “framework review,” the second of what is now intended as a standard five-year review of the US central bank’s financial management process, will begin with discussions among policymakers beginning in January, but look outside the organization as. well through meetings and community events.
“We are open to new ideas and strong solutions and will take lessons from the past five years and adjust our approach when necessary to better serve the American people, to whom we are accountable,” Fed Chair Jerome Powell said in a statement.
In particular, the statement said that the Fed’s 2% inflation target “will not be a focus of analysis,” which may be disappointing to some academics and policy analysts who are sensitive to the definition of the target, and the level at which it is set. to be problems for the central bank of the country.
After a similar review in 2019, the Fed revised its stance in 2020 to put more emphasis on employment targets, and to allow a period of high inflation to offset a period when inflation was low, as it was for most of the 2010s and until. the covid crisis.
Some have blamed that approach, and the Fed’s use of it, as delaying the central bank’s response to inflation as rates begin to rise in 2021.
In comments at the event of the Dallas Fed on November 14, Powell put the main question that the analysis will need to answer: If the experience of the past few years, with the high level and interest rates, means that the central bank should return to one more. The traditional approach to policymaking places more emphasis on keeping inflation at bay and cares less about the problems that come from a low-inflation, low-rate environment.
“Shouldn’t we change the system to show higher interest now, so that some of the changes we’ve made might not be necessary, or, in any case, shouldn’t be the first issue anymore?” Powell said. “The base case should be similar to the traditional reaction function, where you don’t guarantee an overshoot, you only target inflation. We haven’t made a decision yet, but those are the questions we will be asking.”
For most of the 2010s the Fed’s benchmark policy rate was pegged close to the zero level, yet despite the extremely bad monetary conditions inflation was below target. It was a worrying situation for the Fed, and one that led to concerns that the US had entered a long recession.