WASHINGTON: A group of former top world central bankers says the Federal Reserve should scrap its nearly five-year-old bias towards jobs and keep a stricter focus on inflation, a recommendation offered as the US central bank conducts its own strategy review.
The Fed should "always seek to bring inflation back to its 2% inflation target" and drop the current pledge to use periods of high inflation to offset periods when prices rise too slowly, said the panel, chaired by former New York Fed President William Dudley and including former central bank officials from China, Mexico, Japan, England and Israel.
The current approach of ignoring low unemployment as an inflation risk and viewing maximum employment as a "broad-based and inclusive goal" should also be dropped, the group said.
"The Federal Reserve's monetary policy tools are ill-suited to ensuring that employment will necessarily be broad-based and inclusive when the economy is at full employment," the group said in a report issued by the G30. "Including this language in the Federal Reserve's monetary policy framework commits the Federal Reserve to an objective that the Federal Reserve cannot achieve in practice if it also wants to hit its 2% inflation target." Fed officials already seem inclined to revise their approach given the inflation struggles that emerged.
The G30 report, released on Wednesday, said the Fed's current framework made sense emerging from the 2010–2020 era of weak inflation and low interest rates, but slowed the Fed's response as inflation pressures began building in the wake of the pandemic.
"In essence, the Fed ended up fighting the last war" from an era when inflation seemed lodged below the central bank's 2% target.
The group also recommended that the Fed change how it manages interest rates, issue more robust forecasts, and offer more explicit guidance on its use of bond purchases. — Reuters
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