Vastavam web: Federal Reserve policymakers fear they are ill-equipped to battle the next recession under their current inflation-targeting approach, and this year are well into an effort to vet new strategies for managing interest rates in a world of muted inflation and low borrowing costs.
But for the U.S. central bankers and monetary policy experts who converged in Palo Alto Friday to discuss available options, the challenge was clear: not only will it be difficult to settle on a better framework before the next recession hits, figuring out how to explain it to the public so that it actually works will be a major challenge.
When central bankers around the world reached for unconventional tools like bond buying and forward guidance to fight the 2007-2009 financial crisis, they thought they were facing once-in-a-lifetime conditions. But a decade on from the end of the Great Recession, it’s clear the Fed is dealing with a new economic norm. Neither inflation nor interest rates are expected to rise much even with U.S. unemployment at a near 50-year low.
That leaves the central bank with much less leeway to cut interest rates to stimulate the economy than it historically has had. Among the ideas: commit to making up for bouts of low inflation with periods of above-target inflation; target economic output, rather than inflation directly; and use negative interest rates to force businesses to invest and banks to lend during downturns.