Price level targeting may be a better tool for the Federal Open Market Committee than inflation targeting, Federal Reserve Bank of St. Louis President James Bullard said Wednesday.
With the Fed missing its 2% inflation target since 2012, price level targeting may be a better policy option, but “it would likely take a lot of careful preparation and debate before any changes could be made,” Bullard told the CFA Society of St. Louis, according to text released by the Fed.
Although it’s only one possible alternative, as is nominal income targeting, Bullard said, price level targeting “constitutes optimal monetary policy in many macroeconomic models.”
The recent discussions of alternatives to inflation targeting have cropped up since, in addition to being below the inflation target for five years, inflation “surprised to the downside” last year.
Price level targeting would require the Fed to hit the 2% inflation target “on average over the medium term.” So, misses would have to be compensated for. “In contrast, today’s inflation targeting regime simply allows misses and does not do anything about them,” he said.
The starting point should be 1995, he said, since inflation was near 2% from then until 2012. Even under this method, if inflation rose to 2.5%, about where it was from 2004-2007, he said, it would take 10 years to “return to the price level path.”
While price level targeting has yet to be tested at a major central bank recently, Bullard said, “it could become a focus of future monetary policy arrangements.”
Even if implementing price level targeting could not be completed soon, “the ideas behind it could influence near-term policy.”