Fed may need ‘ex­treme’ pol­icy to face shocks: Evans

The Sun (Malaysia) - - SUNBIZ -

FRANK­FURT: Chicago Fed­eral Re­serve Bank pres­i­dent Charles Evans yes­ter­day be­came the sec­ond Fed pol­i­cy­maker in re­cent days to call for a new ap­proach to rate-set­ting that would al­low the cen­tral bank to re­spond to shocks when in­ter­est-rate cuts alone are not enough.

One op­tion is so-called price-level tar­get­ing, Evans said in re­marks pre­pared for a European Cen­tral Bank con­fer­ence in Frank­furt.

Un­der such a strat­egy, a cen­tral bank com­bats bouts of too-low in­fla­tion by al­low­ing in­fla­tion to run too high for a time. Evans cham­pi­oned this pol­icy in 2010 to deal with sag­ging in­fla­tion, but ul­ti­mately the Fed re­jected such an “ex­treme” idea as too dif­fi­cult to un­der­take dur­ing an eco­nomic cri­sis, Evans said yes­ter­day.

Now that eco­nomic times are calmer, Evans said, the Fed can study and an­a­lyse this and other ap­proaches, and pre­pare the pub­lic for their pos­si­ble use in the next se­vere down­turn if the Fed cuts rates to zero and still needs more fire­power to get the econ­omy grow­ing again. Bouts of zero in­ter­est rates are likely to be­come more com­mon in the fu­ture as po­ten­tial eco­nomic growth slows, Evans and other Fed pol­i­cy­mak­ers be­lieve.

Last week, San Fran­cisco Fed pres­i­dent John Wil­liams em­braced the idea of price-level tar­get­ing as a way to set rates in the fu­ture, though he too said such a shift would re­quire plenty of study and de­bate. – Reuters

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