By Nick Timiraos
NEW YORK -- Interest rates will need to remain at historically low levels for a lengthy period to return inflation to the Federal Reserve's 2% inflation goal, a top central bank official said Friday.
"With price inflation showing little sensitivity to resource utilization, policy may have to remain accommodative for a long time to achieve 2% inflation following a period of undershooting," said Fed governor Lael Brainard in remarks prepared for delivery at a conference Friday hosted by the University of Chicago's Booth School of Business.
The Fed cut its benchmark interest rate three times last year, to a range between 1.5% and 1.75%, to cushion the U.S. economy against risks of a global slowdown. Officials believe that level is low enough to stimulate growth during a period in which the Fed's preferred inflation gauge has drifted below 2%.
Fed officials are preparing by the middle of the year to announce any changes to their inflation-targeting framework. The yearlong review is designed to update the Fed's approach to setting rates for a world in which lower inflation and lower interest rates make it highly likely that the Fed will have less room to counteract a downturn by cutting short-term rates and that it will rely on asset purchases and communication about its plans to hold rates at low levels.
Ms. Brainard said it was important the Fed "clarify in advance that we will deploy a broader set of tools proactively to provide accommodation when shocks are likely to push the policy rate" to zero.
Ms. Brainard endorsed a change in which the Fed would take into account past misses of its 2% inflation target when deciding on how to set policy. Currently, the Fed doesn't account for past misses, letting bygones be bygones. "To be fully effective," she added, "proactive use of an expanded tool kit needs to be coupled with a new strategy that achieves average inflation outcomes of 2% ... over time."
Because the Fed will be less able to counteract downturns by cutting interest rates, Ms. Brainard said it was "vital" for fiscal policy, or changes in taxes and spending, to play a more muscular and immediate role in responding to economic downturns.
(END) Dow Jones Newswires
February 21, 2020 10:30 ET (15:30 GMT)
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