Fed Economist Says It Should Build Up Capital
October 16, 2010, 6:20 PM ET
By Jon Hilsenrath and Mark Whitehouse
Fed Economist Says It Should Build Up Capital
A senior Federal Reserve economist says the Fed should be setting aside more of its immense profits as a safeguard against future potential losses.
“The Fed is earning and turning over to the Treasury an enormous amount,” James McAndews, co-head of research at the Federal Reserve Bank of New York, said during a panel discussion at the Boston Fed’s monetary policy conference. “There is a case that of these extraordinary earnings today, some portion of those could be set aside.”
The Fed’s holdings have expanded from about $900 billion before the financial crisis to more than $2.3 trillion today. For now, the Fed is raking in profits on those holdings, which consists largely of Treasury bonds and mortgage backed securities. It turns the bulk of its profits over to the U.S. Treasury.
Through Oct. 13, the Fed had handed $60 billion in profits to the Treasury, up from $27 billion during the same stretch last year, according to Louis Crandall, an economist with Wrightson ICAP LLC, a securities firm.
However the Fed could easily one day turn losses. Say, for instance, inflation starts rising and the Fed needs to sell some of its immense portfolio of bonds to push interest rates up in order to counter inflation. It could lose money on the bonds it sells. It also pays interest to banks for reserves that they keep with the Fed. If interest rates move higher, the Fed’s interest outlays on these reserve could rise too.
Some Fed officials say they aren’t worried about this – including Mr. McAndrew’s, boss, William Dudley, the New York Fed president. Big losses wouldn’t be the same catastrophe for the Fed that they are for commercial banks. That’s because unlike commercial banks, the Fed can print its own money. It doesn’t have to worry about running short of funds the way commercial banks do.
“It is true that the larger the size of the balance sheet, the more likely it is that the Fed would ultimately sell assets back into the market, potentially at prices that could result in losses,” Mr. Dudley said in a recent speech. “Although some fear that such losses could compromise the Federal Reserve’s independence, there is no reason why this should be the case, providing we stick closely to our mandate at all times.”
Still, some economists counter that the Fed could use a bigger buffer against potential losses, if for no other reason to avoid bad appearances in the future. Its total capital, at $57 billion, is just 1.1% of total assets. If it runs through all of its capital, that wouldn’t look very good for the central bank, even though it can print all of the money it wants.
Marvin Goodfriend, an economist at Carnegie Mellon’s Tepper School of Business, noted another complication at the Boston Fed panel. Say the Fed has to push up the interest rate it pays on bank reserves to fight inflation and at the same time it is running big losses because its older bonds don’t pay much interest. It could be in the unusual position of printing money to cover its costs at the same time that it is trying to tame inflation.
Mr.Goodfriend the Fed should get a capital transfer from the U.S. Treasury. Laurence Meyer, of Macroeconomic Advisers, shot back, “absolutely not.” Mr. McAndrews said retaining more of its present profits would be a “good risk management approach,” which would ensure it has a bigger buffer for a rainy day in the future.
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Monday, October 18, 2010
Sunday, October 17, 2010
Regarding Fed's policy @an
I don't think the current U.S. financial environment needs an additional easing; QEⅡ. At this point, further expansion of the Fed's balance sheet could be more harm than benefit. It's too early to square up the widely-scattered opinions at this point. We would have to contemplate the cost and benefit of the additional asset purchases with an eye to the exit. I’m the one of those who are seriously worried that the excess liquidity begins to exert a bad impact on the unintended area such as commodity markets or emerging countries.
On the other hand, the level of the price is certainly too low as financial officials seriously express their concerns. Being very difficult to conquer the deflation once we would be trapped by, we should reduce that risk whatever it'll take right now. So I assume that the setting of the simple and clear-cut price-level target is very effective to stabilize and then increase the price.
Taking into consideration the fact that the recovery in the function of interest rate is a prerequisite condition for the health of the financial system, the current U.S. economic condition provide a strong reason for the efficiency-oriented action to boost the price.
On the other hand, the level of the price is certainly too low as financial officials seriously express their concerns. Being very difficult to conquer the deflation once we would be trapped by, we should reduce that risk whatever it'll take right now. So I assume that the setting of the simple and clear-cut price-level target is very effective to stabilize and then increase the price.
Taking into consideration the fact that the recovery in the function of interest rate is a prerequisite condition for the health of the financial system, the current U.S. economic condition provide a strong reason for the efficiency-oriented action to boost the price.
Evans Says U.S. in ‘Liquidity Trap,’ Needs Fed Action (Update1)
Evans Says U.S. in ‘Liquidity Trap,’ Needs Fed Action (Update1)
By Vivien Lou Chen and Joshua Zumbrun
Oct. 16 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the U.S. is in a “bona fide liquidity trap” and needs “much more” monetary accommodation in the face of high unemployment and inflation that’s too low.
“If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call,” the regional bank chief said in a speech in Boston today. He advocated targeting a path for the price level as a way to stop the inflation rate from falling.
Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released this week.
Fed Chairman Ben S. Bernanke said yesterday that there appears to be a “case for further action.” Some regional Fed presidents, including Philadelphia’s Charles Plosser, have questioned the need ease monetary policy further.
“I believe the U.S. economy is best described as being in a bona fide liquidity trap,” Evans said to the Boston Fed’s 55th Economic Conference. “This belief is not a new development for me; instead it is a dawning realization.” In a liquidity trap, additions to the money supply fail to stimulate the economy.
Easing Steps
The bank president’s comments are among the strongest of any Fed official in favor of additional easing steps. With projections for unemployment to be at 8 percent and for inflation excluding food and energy to be at 1 percent by the end of 2012, “the Fed’s dual mandate misses are too large to shrug off,” Evans said.
He gave his support to a target for the path of the price level over a “reasonable period of time” that is communicated “regularly and often” to the public. Such a policy could complement large-scale asset purchases and a change to the Federal Open Market Committee’s statement to include a pledge to keep rates near zero for longer than “an extended period.”
Targeting a path for the price level would help the Fed push inflation higher “for a time,” Evans said. The central bank would need to state the terms for exiting the policy, he said.
“I’ll admit that my views on this are evolving,” Evans said in response to audience questions. “I think it could be conveyed credibly but there’s a lot of work to establish that and think through what the operational characteristics of this would be.”
Lower Inflation
Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, minutes of the September meeting said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy.
Boston Fed President Eric Rosengren said today that Japan’s battle with deflation shows policy makers should take action to stimulate growth before price levels drop.
“Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it,” Rosengren said in a speech at the conference.
The Bank of Japan pledged last week to keep its benchmark interest rate at “virtually zero” until deflation has ended, after first introducing the rate policy in 1999. Japan also created a fund to buy government debt and other assets.
‘Battling Deflation’
“The fact that Japan is still battling deflation highlights how pernicious deflation can be, and how difficult it is to counteract once it has been firmly established,” Rosengren said.
In the minutes, the Fed gave several options for raising short-term price expectations, including providing more information on the inflation rate policy makers consider consistent with their long-term goals and targeting a path for the price level. For the first time, the Fed said it could also target a path for nominal gross domestic product, which isn’t adjusted for inflation.
Treasuries fell yesterday, driving 30-year yields to a two- month high, and the Dollar Index rebounded from its 2010 low amid confidence Bernanke will succeed in stoking inflation. U.S. stocks rose as technology shares rallied, overshadowing losses in banks and General Electric Co.
Evans, 52, has led the Chicago Fed since September 2007 and doesn’t vote on the rate-setting FOMC this year. He votes every other year on the FOMC, as does Cleveland Fed President Sandra Pianalto.
To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Last Updated: October 16, 2010 15:29 EDT
Related Videos
Watch Bernanke Speaks About Fed Monetary Policy, Inflation
Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about Fed monetary policy. Bernanke, speaking in Boston, said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.
---------------------------------
「米経済成長は現時点で失業率を低下させるには弱過ぎ、インフレ率はデフレ懸念につながる水準で推移している」
By Vivien Lou Chen and Joshua Zumbrun
Oct. 16 (Bloomberg) -- Federal Reserve Bank of Chicago President Charles Evans said the U.S. is in a “bona fide liquidity trap” and needs “much more” monetary accommodation in the face of high unemployment and inflation that’s too low.
“If you reach the conclusion that we are in a liquidity trap, or even near a perilous liquidity trap, more accommodation is not data-dependent or a close call,” the regional bank chief said in a speech in Boston today. He advocated targeting a path for the price level as a way to stop the inflation rate from falling.
Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released this week.
Fed Chairman Ben S. Bernanke said yesterday that there appears to be a “case for further action.” Some regional Fed presidents, including Philadelphia’s Charles Plosser, have questioned the need ease monetary policy further.
“I believe the U.S. economy is best described as being in a bona fide liquidity trap,” Evans said to the Boston Fed’s 55th Economic Conference. “This belief is not a new development for me; instead it is a dawning realization.” In a liquidity trap, additions to the money supply fail to stimulate the economy.
Easing Steps
The bank president’s comments are among the strongest of any Fed official in favor of additional easing steps. With projections for unemployment to be at 8 percent and for inflation excluding food and energy to be at 1 percent by the end of 2012, “the Fed’s dual mandate misses are too large to shrug off,” Evans said.
He gave his support to a target for the path of the price level over a “reasonable period of time” that is communicated “regularly and often” to the public. Such a policy could complement large-scale asset purchases and a change to the Federal Open Market Committee’s statement to include a pledge to keep rates near zero for longer than “an extended period.”
Targeting a path for the price level would help the Fed push inflation higher “for a time,” Evans said. The central bank would need to state the terms for exiting the policy, he said.
“I’ll admit that my views on this are evolving,” Evans said in response to audience questions. “I think it could be conveyed credibly but there’s a lot of work to establish that and think through what the operational characteristics of this would be.”
Lower Inflation
Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, minutes of the September meeting said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy.
Boston Fed President Eric Rosengren said today that Japan’s battle with deflation shows policy makers should take action to stimulate growth before price levels drop.
“Insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it,” Rosengren said in a speech at the conference.
The Bank of Japan pledged last week to keep its benchmark interest rate at “virtually zero” until deflation has ended, after first introducing the rate policy in 1999. Japan also created a fund to buy government debt and other assets.
‘Battling Deflation’
“The fact that Japan is still battling deflation highlights how pernicious deflation can be, and how difficult it is to counteract once it has been firmly established,” Rosengren said.
In the minutes, the Fed gave several options for raising short-term price expectations, including providing more information on the inflation rate policy makers consider consistent with their long-term goals and targeting a path for the price level. For the first time, the Fed said it could also target a path for nominal gross domestic product, which isn’t adjusted for inflation.
Treasuries fell yesterday, driving 30-year yields to a two- month high, and the Dollar Index rebounded from its 2010 low amid confidence Bernanke will succeed in stoking inflation. U.S. stocks rose as technology shares rallied, overshadowing losses in banks and General Electric Co.
Evans, 52, has led the Chicago Fed since September 2007 and doesn’t vote on the rate-setting FOMC this year. He votes every other year on the FOMC, as does Cleveland Fed President Sandra Pianalto.
To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Last Updated: October 16, 2010 15:29 EDT
Related Videos
Watch Bernanke Speaks About Fed Monetary Policy, Inflation
Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke speaks about Fed monetary policy. Bernanke, speaking in Boston, said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.
---------------------------------
「米経済成長は現時点で失業率を低下させるには弱過ぎ、インフレ率はデフレ懸念につながる水準で推移している」
Bernanke Ponders ‘Crapshoot’ Amid Deflation Risk (Update2)
Bernanke Ponders ‘Crapshoot’ Amid Deflation Risk (Update2)
By Scott Lanman
Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke once advocated setting an inflation target to keep prices from rising too fast. Now he may get the Fed to adopt a target to keep the inflation rate from falling.
Minutes of the Fed’s Sept. 21 meeting showed policy makers discussed “providing more detailed information about the rates of inflation” that officials consider consistent with stable prices and maximum employment. The objective would be to boost inflation expectations and stimulate the economy, the minutes said. Bernanke said today that inflation is too low and that the Fed could modify its statement to signal interest rates will stay low for longer than investors expect.
Announcing an inflation goal as a way to accelerate rather than slow price increases has a scant track record outside of Japan’s efforts to beat deflation over the past decade. Fed officials are considering the move alongside a resumption of large-scale asset purchases intended to spur growth and lower unemployment stuck near a 26-year high.
“It’s pretty much a crapshoot,” former Fed Governor Lyle Gramley, now senior economic adviser at Potomac Research group in Washington, said of using an inflation target to support prices. “We don’t really have any background of history to know how it’s going to work.” Still, “it’s worth trying.”
Deflation Risk
Bernanke, 56, said in a speech today at the Boston Fed that “inflation is running at rates that are too low” relative to what the Fed considers consistent with its longer-run goals and that “the risk of deflation is higher than desirable.”
He said the central bank could expand asset purchases or change the language in its statement, without giving new details on how the Fed would undertake those strategies or give assurances the Fed’s Open Market Committee will act at its Nov. 2-3 meeting.
The minutes of last month’s meeting signaled concern among officials about too-low inflation: The report said businesses had “little pricing power” to pass on costs of some commodities and imported goods. Also, declining short-term inflation expectations would increase short-term real interest rates, after taking inflation into account, the minutes said.
Bond traders’ inflation expectations for the next five years, measured by the breakeven rate between nominal and inflation-indexed bonds, rose to 1.68 percent yesterday, the highest level since June, from 1.47 percent on Oct. 12, when the minutes were released.
Consumer Confidence
The Thomson Reuters/University of Michigan consumer confidence survey released today showed consumers in October expected an inflation rate of 2.6 percent over the next 12 months, compared with 2.2 percent projected in September.
New York Fed President William Dudley, in an Oct. 1 speech, listed setting a target for higher inflation as one option for stimulating the economy. While the strategy may avert deflation, or an outright decline in prices, it also risks pushing interest rates higher if investors conclude the Fed “was tinkering with its long-run inflation objective,” he said.
Boosting inflation ranks low among incentives for companies to increase investment, said Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington.
“We’re starting to talk about some true Buck Rogers monetary policy,” Regalia said, referring to the fictional 25th-century space explorer. “We haven’t spent a whole lot of time dealing with these more esoteric approaches to Fed policy.”
Asset Purchases
The Fed in March ended its program of large-scale asset purchases after buying more than $1.7 trillion in Treasuries and mortgage debt. In August, as the economy slowed, it decided to buy Treasuries to replace maturing mortgage debt and keep asset holdings stable at about $2 trillion.
Just two months ago, Bernanke dismissed a proposal by some economists to raise the Fed’s inflation goal.
“Such a strategy is inappropriate for the United States in current circumstances” and could end up “squandering the Fed’s hard-won inflation credibility,” Bernanke said in an Aug. 27 speech in Jackson Hole, Wyoming.
The European Central Bank and Bank of England are among central banks that target an inflation rate through monetary policy. The Fed, by contrast, has no formal inflation objective; instead, Fed officials state a long-run inflation rate they see as consistent with achieving stable prices and maximum employment.
Economic Projections
While Bernanke backed inflation targeting as an academic and a Fed governor, he failed to gain a consensus for one after becoming chairman. Instead, policy makers decided in 2007 to expand their forecasts to include new “long run” projections for growth, inflation and unemployment. Currently, policy makers prefer an inflation rate of about 1.7 percent to 2 percent.
Bernanke may be drawing on work that he and other economists did a decade ago, exploring solutions to deflation in Japan.
Lars Svensson, a former Bernanke colleague at Princeton University who is now deputy governor of Sweden’s central bank, said in a 2000 paper that inflation targeting is part of a “foolproof” plan for escaping a liquidity trap -- if paired with devaluating the currency and pegging the exchange rate. In a liquidity trap, additions to the money supply fail to stimulate the economy.
Bank of Japan
In 2001, the Bank of Japan committed to keeping interest rates low until consumer prices, excluding fresh food, stabilized at or above zero percent. The BOJ raised its key rate from near zero in 2006 as the country emerged from more than seven years of deflation and doubled it to 0.5 percent in 2007.
The BOJ lowered the rate again in 2008 to 0.1 percent, and the country has since relapsed into deflation. On Oct. 5, the central bank pledged to hold its benchmark rate at “virtually zero” until officials foresee a sustained end to deflation.
The Bank of Japan could have been more effective if it had targeted inflation of at least 1 percent, Kazuo Ueda, a policy maker there from 1998 to 2005, said in a paper prepared for the Boston Fed conference, which concludes tomorrow.
In the September minutes, the Fed mentioned two other possible ways to raise inflation expectations: targeting the level of prices, as opposed to the rate of change, and targeting nominal gross domestic product, which isn’t adjusted for inflation. By targeting the price level, the central bank would offset below-goal inflation in one period with faster price increases later on.
Price-Level Target
Price-level targeting has almost no history outside of Sweden, which in the 1930s used it to stop deflation, along with abandoning the gold standard and cutting interest rates, according to a 1998 paper by Claes Berg and Lars Jonung of Sveriges Riksbank, the country’s central bank.
“I am skeptical that it can work as it does in the theoretical models,” said Richard Clarida, a Columbia University professor who’s also a global strategist at Pacific Investment Management Co., which manages the world’s biggest bond fund. One reason is that a Fed chairman or FOMC can’t easily commit their successors to following the same policy, Clarida said at the Boston conference.
Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said a strategy of trying to boost inflation would be “foolish.”
“We’ve known at least since the 1960s that higher inflation will not give us a permanent reduction in unemployment,” said Meltzer. “We’re not going to have high inflation under any circumstances until people start to borrow money.”
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Last Updated: October 15, 2010 15:30 EDT
By Scott Lanman
Oct. 15 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke once advocated setting an inflation target to keep prices from rising too fast. Now he may get the Fed to adopt a target to keep the inflation rate from falling.
Minutes of the Fed’s Sept. 21 meeting showed policy makers discussed “providing more detailed information about the rates of inflation” that officials consider consistent with stable prices and maximum employment. The objective would be to boost inflation expectations and stimulate the economy, the minutes said. Bernanke said today that inflation is too low and that the Fed could modify its statement to signal interest rates will stay low for longer than investors expect.
Announcing an inflation goal as a way to accelerate rather than slow price increases has a scant track record outside of Japan’s efforts to beat deflation over the past decade. Fed officials are considering the move alongside a resumption of large-scale asset purchases intended to spur growth and lower unemployment stuck near a 26-year high.
“It’s pretty much a crapshoot,” former Fed Governor Lyle Gramley, now senior economic adviser at Potomac Research group in Washington, said of using an inflation target to support prices. “We don’t really have any background of history to know how it’s going to work.” Still, “it’s worth trying.”
Deflation Risk
Bernanke, 56, said in a speech today at the Boston Fed that “inflation is running at rates that are too low” relative to what the Fed considers consistent with its longer-run goals and that “the risk of deflation is higher than desirable.”
He said the central bank could expand asset purchases or change the language in its statement, without giving new details on how the Fed would undertake those strategies or give assurances the Fed’s Open Market Committee will act at its Nov. 2-3 meeting.
The minutes of last month’s meeting signaled concern among officials about too-low inflation: The report said businesses had “little pricing power” to pass on costs of some commodities and imported goods. Also, declining short-term inflation expectations would increase short-term real interest rates, after taking inflation into account, the minutes said.
Bond traders’ inflation expectations for the next five years, measured by the breakeven rate between nominal and inflation-indexed bonds, rose to 1.68 percent yesterday, the highest level since June, from 1.47 percent on Oct. 12, when the minutes were released.
Consumer Confidence
The Thomson Reuters/University of Michigan consumer confidence survey released today showed consumers in October expected an inflation rate of 2.6 percent over the next 12 months, compared with 2.2 percent projected in September.
New York Fed President William Dudley, in an Oct. 1 speech, listed setting a target for higher inflation as one option for stimulating the economy. While the strategy may avert deflation, or an outright decline in prices, it also risks pushing interest rates higher if investors conclude the Fed “was tinkering with its long-run inflation objective,” he said.
Boosting inflation ranks low among incentives for companies to increase investment, said Martin Regalia, chief economist at the U.S. Chamber of Commerce in Washington.
“We’re starting to talk about some true Buck Rogers monetary policy,” Regalia said, referring to the fictional 25th-century space explorer. “We haven’t spent a whole lot of time dealing with these more esoteric approaches to Fed policy.”
Asset Purchases
The Fed in March ended its program of large-scale asset purchases after buying more than $1.7 trillion in Treasuries and mortgage debt. In August, as the economy slowed, it decided to buy Treasuries to replace maturing mortgage debt and keep asset holdings stable at about $2 trillion.
Just two months ago, Bernanke dismissed a proposal by some economists to raise the Fed’s inflation goal.
“Such a strategy is inappropriate for the United States in current circumstances” and could end up “squandering the Fed’s hard-won inflation credibility,” Bernanke said in an Aug. 27 speech in Jackson Hole, Wyoming.
The European Central Bank and Bank of England are among central banks that target an inflation rate through monetary policy. The Fed, by contrast, has no formal inflation objective; instead, Fed officials state a long-run inflation rate they see as consistent with achieving stable prices and maximum employment.
Economic Projections
While Bernanke backed inflation targeting as an academic and a Fed governor, he failed to gain a consensus for one after becoming chairman. Instead, policy makers decided in 2007 to expand their forecasts to include new “long run” projections for growth, inflation and unemployment. Currently, policy makers prefer an inflation rate of about 1.7 percent to 2 percent.
Bernanke may be drawing on work that he and other economists did a decade ago, exploring solutions to deflation in Japan.
Lars Svensson, a former Bernanke colleague at Princeton University who is now deputy governor of Sweden’s central bank, said in a 2000 paper that inflation targeting is part of a “foolproof” plan for escaping a liquidity trap -- if paired with devaluating the currency and pegging the exchange rate. In a liquidity trap, additions to the money supply fail to stimulate the economy.
Bank of Japan
In 2001, the Bank of Japan committed to keeping interest rates low until consumer prices, excluding fresh food, stabilized at or above zero percent. The BOJ raised its key rate from near zero in 2006 as the country emerged from more than seven years of deflation and doubled it to 0.5 percent in 2007.
The BOJ lowered the rate again in 2008 to 0.1 percent, and the country has since relapsed into deflation. On Oct. 5, the central bank pledged to hold its benchmark rate at “virtually zero” until officials foresee a sustained end to deflation.
The Bank of Japan could have been more effective if it had targeted inflation of at least 1 percent, Kazuo Ueda, a policy maker there from 1998 to 2005, said in a paper prepared for the Boston Fed conference, which concludes tomorrow.
In the September minutes, the Fed mentioned two other possible ways to raise inflation expectations: targeting the level of prices, as opposed to the rate of change, and targeting nominal gross domestic product, which isn’t adjusted for inflation. By targeting the price level, the central bank would offset below-goal inflation in one period with faster price increases later on.
Price-Level Target
Price-level targeting has almost no history outside of Sweden, which in the 1930s used it to stop deflation, along with abandoning the gold standard and cutting interest rates, according to a 1998 paper by Claes Berg and Lars Jonung of Sveriges Riksbank, the country’s central bank.
“I am skeptical that it can work as it does in the theoretical models,” said Richard Clarida, a Columbia University professor who’s also a global strategist at Pacific Investment Management Co., which manages the world’s biggest bond fund. One reason is that a Fed chairman or FOMC can’t easily commit their successors to following the same policy, Clarida said at the Boston conference.
Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said a strategy of trying to boost inflation would be “foolish.”
“We’ve known at least since the 1960s that higher inflation will not give us a permanent reduction in unemployment,” said Meltzer. “We’re not going to have high inflation under any circumstances until people start to borrow money.”
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.
To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
Last Updated: October 15, 2010 15:30 EDT
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