(Reuters) - The head of the Federal Reserve Bank of Atlanta, Raphael Bostic, waded into a potentially contentious debate at the U.S. central bank on Tuesday over whether to replace its 2 percent inflation target, saying he favours a new and nearly untested monetary policy strategy known as price-level targeting.
That strategy, unlike the inflation-targeting approach in current use by the Fed and many other central banks, requires a central bank to allow inflation to run high to make up for periods of low inflation.
“I am going to add myself to the list of people sympathetic to a policy framework that has a form of price-level targeting at its centre,” Bostic said in a post on the Atlanta Fed’s blog.
Fed Chair Jerome Powell has so far given little indication he is interested in a wholesale rethinking of the Fed’s 2 percent inflation-targeting framework.
But a majority of Fed policymakers have said they support at least having such a debate, arguing that the Fed may need a new source of firepower to combat future recessions because interest rates are expected to be generally lower than in the past.
Because lower interest rates mean the Fed has less scope to deliver stimulus just by cutting interest rates, they say that adopting a new framework could make it easier to attain the Fed’s dual goals of stable prices and full employment.
Former Fed Chair Ben Bernanke and San Francisco Fed chief John Williams are among advocates for a switch to price-level targeting.
The approach has been used only once on the global stage, by the central bank of Sweden in the 1930s. Critics say it would be difficult to implement in part because the public would not readily accept high inflation.
Bostic said in the blog that he wants to stick to a 2 percent inflation target - but as an average rate over time, rather than as a fixed goal no matter the extent or length of time that inflation misses the goal, as it has for the last several years.
Indeed, Bostic said, until recently the Fed’s 2 percent target has functioned as a price-level target.
Bostic said he would lay out his plan in more detail in a blog post to be published Wednesday.
Reporting by Ann Saphir; Editing by Leslie Adler