Average inflation targeting may be an effective tool in the current economic environment, where sluggish price increases have forced central banks to keep interest rates low, constraining the tools at their disposal in times of crisis, according to economists at the Federal Reserve Bank of San Francisco.
The tool is “a monetary policy framework that is well suited for the current environment,” economists Renuka Diwan, Sylvain Leduc and Thomas Mertens wrote in an Economic Letter, published Monday.
The U.S. central bank last year embarked on a review of its policy strategy and average inflation targeting is one of the options it is looking at during this so-called framework review. Chair Jerome Powell, speaking at a July 29 press conference, said deliberations would be wrapped up in the “near future.”
The Fed targets inflation at 2% in an effort to keep prices from rising too quickly, as happened in the 1970s and 1980s. In the past decade, however, price growth has struggled to reach the target. To try and raise prices, the Fed kept interest rates relatively low, limiting how much it could ease monetary policy when the coronavirus pandemic disrupted the economy earlier this year.
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