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Fed's Rosengren faults inflation target, warns of harm

Reuters 

By Ann Saphir

(Reuters) - The recent drop in U. S. unemployment could spark a surge in that, given the Federal Reserve's current policy framework, could trigger interest-rate hikes that bring on a recession, Eric warned on Friday.

"I'm disagreeing with that framework," said at the in San Diego, referring to the Fed's "balanced" approach to achieving a 2-percent target and full employment.

The adopted this framework six years ago and has reaffirmed it each year since.

Now, as prepares to take the reins as from when her term ends early next month, a growing number of policymakers want to rethink that framework.

Rosengren's comments Friday put the sharpest point to date on the debate, suggesting that a strict 2-percent target could force the to slam the brakes on the economy with aggressive rate hikes if the unemployment rate, now at 4.1 percent, continues to sink. It is already below the level that many economists think can be sustained without putting upward pressure on

While running stubbornly below 2 percent has so far allowed the to lift rates only gradually, that may change, warned.

"My concern is if we get too far away from where we want to be on a sustainable unemployment rate, and we use this current framework, then we will get to a situation where we have to raise rates fast enough that we will actually find it very difficult to get back to full employment without causing a recession," said.

suggested replacing the 2-percent target with a target range for of between 1.5 percent and 3 percent, in line with actual experience over the last 20 years.

Under current conditions of low productivity and labour force growth, he said, the would target at the upper end of that range, and would be more patient with rate hikes.

Rosengren's solution, proposed publicly for the first time in detail in his Friday speech, differs from approaches preferred by some of his colleagues, including targeting an average rate of 2-percent inflation, or lifting the target to 4 percent.

But common to all of the approaches is the view that the central needs better leverage against future recessions than the current approach affords.

"We are approaching a time when a comprehensive reconsideration of the monetary policy framework is likely warranted," said.

(Reporting by Ann Saphir; editing by Diane Craft)

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

First Published: Sat, January 13 2018. 04:56 IST
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