By Nick Timiraos 

WASHINGTON -- Former Federal Reserve Chairwoman Janet Yellen said central-bank officials should formally adopt a policy they employed earlier this decade that commits to holding interest rates lower for longer than they otherwise would when their short-term benchmark rate is near zero.

The problem of what to do when the Fed runs out of room to cut rates remains a worry for many policy makers because interest rates are far lower than they were during comparable periods of low unemployment and steady economic growth. The risk is that the Fed will have fewer ways to fight a recession as a result.

Ms. Yellen has maintained a low public profile since leaving the Fed in February after completing a four-year term as chairwoman, four years as vice chairwoman and six years as president of the San Francisco Fed. She spoke Friday at a conference at the Brookings Institution, where she is a distinguished fellow.

The Fed's benchmark rate is currently in a range between 1.75% and 2%, after being close to zero for years after the 2008 financial crisis.

Several Fed officials have said the problem of being stuck near the so-called zero-lower-bound, where interest rates are cut to near zero, should prompt the Fed to consider changing its policy of targeting 2% inflation.

Ms. Yellen's proposal is less revolutionary and more evolutionary.

While other approaches "deserve study and debate," Ms. Yellen said she sees "considerable disadvantages with each of them."

The approach of committing to "lower-for-longer" interest rates after a spell at the zero-lower-bound is more practical, Ms. Yellen said. It would formalize a policy the Fed employed during her terms as vice chairwoman and chairwoman.

The rate-setting Federal Open Market Committee "could explicitly endorse that the committee will set short-term rates 'lower-for-longer' than would be called for by standard monetary-policy rules" when short-term rates have already been cut to zero, Ms. Yellen said.

One advantage of the approach is that it would largely leave in place the Fed's 2% inflation target, which is "well understood" and has "contributed considerably to the attainment of good macroeconomic performance in the U.S.," she said.

Adopting or formalizing the "lower-for-longer" approach now, before the next recession hits, would make this type of guidance more credible in a downturn, Ms. Yellen said.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

September 14, 2018 12:15 ET (16:15 GMT)