Fed’s Williams discusses options

Federal Reserve Bank of New York President John Williams said that in a world with a lower neutral interest rate -- the dividing line between tight and easy monetary policy -- officials will be fighting to keep inflation from drifting too low rather than too high.

Williams did not touch on the Fed’s current interest-rate setting in a speech discussing potential future frameworks for monetary policy. More broadly, he raised a concern about sticking with the status quo as the central bank starts to explore alternatives to the way it sets interest rates.

Maintaining the basic strategy of inflation targeting and relying on a combination of aggressive conventional and unconventional policy actions when facing economic downturns “carries with it the risk that inflation expectations become anchored at too low a level,” he said.

Federal Reserve Bank of New York President John Williams

Global interest rates have fallen lower in recent decades, weighed down by demographics, demand for safe and liquid assets, and weak productivity growth, and the New York Fed president said that it’s reasonable to assume that the trend will persist “for the foreseeable future.”

Williams has been at the forefront of research on the topic, along with fellow Fed official Thomas Laubach, and will be an influential voice as the Fed discusses its future policy-framework options in a planned 2019 review.

In his speech, the New York Fed chief said that in theory, both average-inflation and price-level targeting -- two potential alternatives to the Fed’s current practice of targeting 2% inflation, with only mild overshoots and undershoots that don’t average out over time -- could work to anchor inflation expectations.

Still, “neither will likely be effective in practice unless communicated clearly and carried out consistently over time,” he said. “More broadly, all of these proposed strategies face potential costs and benefits -- in terms of macroeconomic performance, communication, and robustness to uncertainty -- which require careful study.”

Bloomberg News
Monetary policy
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