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.
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”.
To pull this off, a central bank must be able to speak clearly and simply to the wider public. And everyday consumers need great confidence in their central bank. “Crisis-era policymakers,” he said, “had major questions about whether their promise of good times to come would really have moved the hearts, minds and pocketbooks of the public.”
In other words, for a central bank to encourage growth now by promising to make up for any lost growth and inflation in the future, the public must understand what the bank does. They must also believe that the bank will do what it says. Neither of these is a given.
In public events around the country this year, Federal Reserve banks have been discussing how to talk to the public. In the not-too-distant past, the Fed didn’t like to say anything. Since the financial crisis, it has focused on talking with data to investors, to move markets. Now it is considering learning how to speak in English, to people.
“The reason no central bank has ever really done it,” Mr Powell said in Zurich about make-up strategies, “is it’s hard to find a way to implement practically.”
After his remarks, Mr Powell’s hosts at the Swiss Institute of International Studies gave him a leather belt, embossed with metal. So he could tighten, or loosen, as appropriate.