Jerome Powell, chairman of the U.S. Federal Reserve, arrives to a Group of 20 (G-20) finance ministers and central bank governors meeting on the sidelines of the spring meetings of the International Monetary Fund (IMF) and World Bank in Washington, D.C., U.S., on Friday, April 12, 2019. Photographer: Andrew Harrer/Bloomberg
© 2019 Bloomberg Finance LPAnyone who has tried their hand at archery knows there's an easy solution for arrows that fall repeatedly short of the target―aim higher.
That's just the situation in which Federal Reserve officials find themselves. And some appear, albeit too gradually, to be learning their lesson.
The Fed, which has fallen short of its 2% inflation target for most of the recovery from the Great Recession, is undertaking a review of its monetary policy "strategy, tools and communications"[1] led by Vice Chair Richard Clarida.
Officials recognize that, with interest rates at just 2% and unlikely to go much higher if at all[2] given weakening economic conditions, they will have limited room to cut borrowing costs when the next recession hits[3] before hitting zero again. That will force policymakers to again purchase bonds in large quantities, a policy that proved effective but controversial during the last downturn.
If the Fed had a higher inflation target going into the 2007-2009 slump, policymakers would have been forced to respond earlier and more aggressively to the downturn, likely shortening its severity and duration.
Moreover, policymakers would have refrained from raising rates over the last two years despite signs that, despite a low unemployment rate, wages for most workers had yet to pick up substantially, certainly not enough to make up the ground lost during the recession....