Forcing the Federal Reserve to follow operational mandates would inhibit its freedom to go out of the box during crises, according to Federal Reserve Bank of San Francisco President and CEO John C. Williams.
"There is no question that monetary policy rules provide an invaluable tool for research and practical policy considerations at central banks," Williams told an audience at Chapman University, according to prepared text released by the Fed. The downside, he noted, is many issues need to be addressed.
One issue is what happens when rates are lowered to zero, such as has been the case in the U.S. In the current situation, if possible, rates should have been negative, Williams said, but the Fed was able to use other methods "to provide the missing monetary stimulus," including asset purchases and forward guidance. "In such circumstances, which are very likely to occur again in the future, a policy rule mandate will be silent. Moreover, research shows that the very presence of the zero lower bound argues for deviating from a standard policy rule around times when the constraint binds," he said.
