- Jerome Powell, the new Federal Reserve chairman, pushed back against any changes to the central bank’s 2% inflation-targeting framework.
- Powell also downplayed a new study arguing that the Fed’s bond purchases were less effective than previously thought.
- Taken together, the two suggest that bond buys, or quantitative easing, will be an active Fed tool in the next recession.
Federal Reserve Chairman Jerome Powell just dropped a major — but largely unnoticed — hint that the central bank has far from abandoned a controversial tool it used earnestly in response to the Great Recession and its aftermath: the bond purchases that became known as quantitative easing, or QE.
Two things Powell said indicated the Fed could be forced to resort to bond buys during the next recession.
First, he wholly dismissed a range of suggestions aimed at raising the central bank’s inflation target, with an eye to preventing official borrowing costs from going to zero again. The idea is that a higher inflation environment also calls for a higher federal funds rate, giving the Fed more room to ease monetary policy when the economy sours.
Second, he brushed aside a new paper by two Wall Street economists and two academics downplaying the effectiveness of QE, presented at the Chicago Booth annual monetary-policy conference in New York last week.
On the inflation framework, Powell pushed back against proposals, including from Fed officials, to either raise the Fed’s inflation target or move to a different approach that would allow for more aggressive interest-rate cuts during a recession.
Powell said the existing framework was working.
“The market understands it,” he said.
The Fed has hinted in the minutes of previous meetings at a possible review of the inflation-target framework. Powell’s statement appeared to pour cold water on the idea, which his immediate predecessor, Janet Yellen, supported.
Meanwhile, Powell responded directly to new research suggesting the Fed’s QE policies were not as powerful as previously thought.
In response to the Great Recession and a weak economic recovery, the Fed embarke
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