A panel of former top central bankers has advised the Federal Reserve to abandon its nearly five-year-old policy framework, which prioritizes employment over inflation control. The group, led by former New York Fed President William Dudley and including ex-officials from central banks worldwide, argues that the Fed should strictly focus on maintaining its 2% inflation target. They recommend dropping the current strategy of tolerating periods of high inflation to compensate for times when prices rise too slowly.
The panel suggests that the Fed’s monetary tools are not well-suited to ensuring broad-based and inclusive employment when the economy is at full employment. This language was introduced amid concerns about economic inequality and social tensions in the U.S.
The Fed is currently reviewing its strategy, implemented in August 2020 during the pandemic, which emphasized low interest rates and bond purchases until the job market recovered. However, this approach slowed the Fed’s response to rising inflation post-pandemic, making the situation riskier.
The report criticizes the Fed for focusing on past economic conditions where inflation was below target and unemployment did not significantly impact prices. This led to a delayed response to strong growth, a tight labor market, and rising inflation in 2021. Although subsequent rate hikes helped reduce inflation, the delay increased the risk of losing control of public inflation expectations and caused stress in the financial sector.
The group also recommends changes in how the Fed manages interest rates, provides forecasts, and communicates its bond purchase strategies.
— new from Reuters