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Cracks could be forming among Federal Reserve officials as some begin to question the feasibility of the Fed’s “lower for longer” rate policy. Nick Timiraos reports for The Wall Street Journal:
Federal Reserve promises to hold interest rates very low for a long time could pose a dilemma once the pandemic is over: how to deal with the risk of asset bubbles.
Those concerns flared when Dallas Fed President Robert Kaplan dissented from the central bank’s Sept. 16 decision to spell out those promises. The Fed committed to hold short-term rates near zero until inflation reaches 2% and is likely to stay somewhat above that level—something most officials don’t see happening in the next three years.
“There are costs to keeping rates at zero for a prolonged period,” Mr. Kaplan said in an interview. He added that he worries such a commitment “causes people to take more risk in that they know it’s much less likely that they’re going to be able to earn on savings.”
The question of whether the Fed should raise rates to prevent bubbles from forming has long vexed officials. Mr. Kaplan’s concerns show how the lack of consensus could one day sow doubts over the central bank’s ability or willingness to follow through on the new lower-for-longer rate framework Fed Chairman Jerome Powell unveiled last month.
The new strategy, adopted unanimously by the Fed’s five governors and 12 reserve-bank presidents, alters how the central bank will react to changes in the economy. The Fed is now seeking periods of inflation above its 2% target to compensate for periods like the current one, when inflation is running below that goal and short-term rates are pinned near zero. This means the Fed will effectively abandon its prior approach of raising rates pre-emptively, before inflation reaches 2%.
