德银-美联储政策框架：价格合适么？-美股-宏观经济-20171121_22页_747kb

Summary of Fed Policy Framework Debate: Is the Price (Level) Right?

Core Content

The Federal Reserve is currently facing increasing discussions about whether to reconsider its current policy framework, which targets a 2% inflation rate. This debate has gained momentum among Fed officials, including regional presidents and former chairmen, and is expected to be reflected in the upcoming minutes. While no definitive changes are anticipated, the conversation is significant for understanding the Fed's evolving approach to monetary policy.

Main Reasons for the Debate

The debate is driven by several key factors:

• Low r-star (neutral real fed funds rate): Empirical research suggests that r-star has declined over time, especially since the financial crisis. This implies that future tightening cycles may reach lower peak rates, increasing the likelihood of hitting the zero lower bound (ZLB) on interest rates.
• Leadership turnover: With Governor Jay Powell set to replace Janet Yellen as chair, and other senior officials retiring, there is an opportunity for a re-evaluation of the policy framework.
• Calm economic environment: The current economic conditions are stable, with solid growth and a labor market near full employment. This makes it an appropriate time to consider framework changes before the next downturn.
• Constraints on unconventional monetary policy: The Fed may face political and technical challenges in using large-scale asset purchase programs in the future. A more robust framework could help avoid such constraints.

Key Policy Options

The report outlines several potential new frameworks, each with its own pros and cons:

1. Higher Inflation Target

• Definition: Raising the inflation target from 2% to 3% or 4%.
• Pros:
  • Incremental change relative to current policy.
  • Well-understood framework.
  • Allows for more flexibility in responding to transitory inflation shocks.
• Cons:
  • Politically unpalatable due to concerns over reduced purchasing power.
  • May lead to more volatile inflation.
  • Risk of inflation expectations becoming un-anchored if the Fed is seen as acting with discretion.
• Market Implications:
  • Higher inflation risk premium.
  • Initial need for a more dovish policy to build credibility.
  • Reduced likelihood of future QE.

2. Price Level Targeting

• Definition: Aiming for an average inflation rate over time, rather than a specific rate.
• Pros:
  • Reduces the odds of hitting the ZLB.
  • Reinforces the Fed's credibility in pursuing accommodation post-recession.
  • Can counteract entrenched inflation expectations.
• Cons:
  • Requires significant communication and buy-in.
  • May be difficult for households to understand.
  • Past inflation realizations heavily influence expectations, leading to greater volatility.
• Market Implications:
  • Modestly higher long-term inflation risk premium.
  • Reduced likelihood of near-zero interest rates during downturns.
  • Potential for more volatile yield curves in short-to-medium durations.

3. Nominal GDP Targeting

• Definition: Targeting either the growth rate or the level of nominal GDP.
• Pros:
  • Relies on observed data, not unobservable variables like potential GDP or NAIRU.
  • Simplifies the messaging around the dual mandate.
  • Can provide more room for monetary policy during recessions.
• Cons:
  • May face criticism when one mandate is met and the other is not.
  • Symmetric misses (e.g., high inflation and low GDP growth) may appear as success but feel otherwise.
  • Risk of time-inconsistency and opportunistic target changes.
• Market Implications:
  • Similar to price level targeting, with potential for greater volatility in short-term inflation expectations.
  • May lead to more accommodative policies during recessions.

Conclusion

While all proposed frameworks have drawbacks and none clearly dominate the current setup, price level targeting and nominal GDP targeting are seen as having more merit than a higher inflation target. However, the report suggests that a meaningful market-relevant change is unlikely in the near term due to the significant trade-offs and the Fed's preference for maintaining policy inertia. The discussion is expected to continue over the coming months, with market participants closely monitoring for any shifts in the Fed's approach. Unconventional monetary policies may also continue to play a role, reducing the urgency for a full framework overhaul.