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Fed chairman says making up for lost inflation is 'great idea'

Section: Daily Dispatches

By Brendan Greeley
Financial Times, London
Saturday, September 7, 2019

In Zurich on Friday, Jay Powell, chairman of the Federal Reserve, repeated his mantra from this summer that the Fed will continue to "act as appropriate to sustain the expansion." Markets were unsurprised and unmoved.

But after that, he got technical.

Talking about the challenges of easing in a potential downturn when policy rates are already close to zero -- something he has called the "pre-eminent monetary policy challenge of our time" -- he offered one specific strategy: make-up inflation.

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When a central bank undershoots its inflation target, Mr. Powell explained, it can promise to the public that it will overshoot in the future. As it makes up for lost inflation, the bank would also be making up for lost growth.

"If the public understands and acts up on that, we limit the damage from the recession," he said. "It's a great idea."

It was not the first time Mr Powell has talked about make-up strategies. At a conference in Chicago in June, part of the Fed's sweeping review of how it both functions and talks to the public, he lingered on the idea.

Policymakers had talked about make-up inflation after the financial crisis, but had decided against it. For make-up strategies to work, Mr. Powell said in Chicago, "households and businesses must go out on a limb, so to speak, raising spending in the midst of a downturn." ...

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