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Fed may need 'extreme' policy to deal with future shocks: Evans

Reuters  |  FRANKFURT 

By Ann Saphir

FRANKFURT (Reuters) - Federal Reserve President Charles on Tuesday became the second policymaker in recent days to call for a new approach to rate-setting that would allow the central to respond to shocks when interest-rate cuts alone are not enough.

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

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

Now that economic times are calmer, said, the can study and analyze this and other approaches, and prepare the public for their possible use in the next severe downturn if the 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, and other policymakers believe.

Last week, San Francisco 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.

Both men referenced the recent work of former Chair Ben Bernanke, who last month argued for a framework where the is to adopt price-level targeting on a temporary basis when rates became too low for conventional policy.

"My aim today is not to argue for state-contingent price-level targeting," said on Tuesday. "That may be a good way to go, but at this point I just don't know. My point is that we should be planning for these inevitable future situations today."

cautioned that success of any new strategy hinges on the delivering on its current policy goal of 2-percent inflation.

"If we fail to do so under our current relatively normal circumstances, why then would the public believe us in the future when we try again to implement unconventional policies?" asked.

(Reporting by Ann Saphir; Editing by Jacqueline Wong)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Tue, November 14 2017. 14:06 IST
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