(Bloomberg) -- Federal Reserve Vice Chairman Richard Clarida suggested that the central bank is seriously considering the possibility of altering its strategy for achieving price stability.
Under the new approaches that the Fed is examining, the central bank would commit to make up for past deviations from its 2% inflation target, rather than treating misses of the goal as bygones, as it does now.
“These make-up strategies lead to better average performance” of the economy in many macroeconomic models, Clarida said at a San Francisco Fed event on Thursday.
“One of the most important questions” that the Fed is wrestling with is whether it could actually attain the benefits of make-up strategies that are possible in the models, he said.
The Fed is in the midst of an extensive strategic review that is expected to wrap up in the first half of next year. It incorporates potential changes in communication practices and an assessment of its monetary policy tools, including asset purchases and forward interest-rate guidance.
Summing up the Federal Open Market Committee’s initial discussions, Clarida said that policy makers concluded that bond buying and providing a steer on rates can be used “more confidently” than they were during the financial crisis.
“However, overall, we judged that forward guidance and balance sheet tools, while helpful, did not eliminate the risk of returning to the ELB,” or effective lower bound for interest rates, he said.
Clarida said it was a good time for the Fed to be conducting its review because the economy is operating at or close to maximum employment and price stability.
At the current jobless rate of 3.7%, the labor market is in the range of plausible estimates of maximum employment, he said.
“Although the labor market is robust, there is no evidence that rising wages are putting upward pressure on price inflation,” he added. “U.S. inflation expectations today do reside in a range I consider consistent with our price-stability mandate.”
