Let's not wait for the next storm: Fed president
Former Yellen adviser calls for rethink of Fed policy
Federal Reserve Bank of San Francisco President John Williams called for monetary and fiscal policy makers to rethink the way they operate, saying America is getting a taste of a new economic normal that warrants a change in orthodoxy.
Williams’s analysis centers on the idea that neutral interest rates — those that neither stoke nor slow the economy — are historically depressed and are poised to stay that way. To better adapt, he urged governments to prepare to provide a stronger fiscal backstop and central bankers to consider scrapping the practice of targeting low inflation.
“We can wait for the next storm and hope for better outcomes or prepare for them now and be ready,” Williams wrote in an essay published Monday by the San Francisco Fed. While he isn’t a voting member of the policy-setting Federal Open Market Committee this year, Williams is one of the foremost experts on the natural interest rate.
Williams, who was Fed Chairwoman Janet Yellen’s top policy adviser when she was San Francisco Fed chief, joins a chorus of central bankers calling for stronger fiscal measures and a rethink as years of ultra-low interest rates and unconventional policies fail to stimulate breakout growth.
He’s also the second Fed policymaker in two months to suggest a major break with how the U.S. central bank conducts itself. The St. Louis Fed’s James Bullard on June 17 announced that he would stop submitting long-term economic forecasts and lowered his rate projection to one hike in 2016 and none during 2017 and 2018, based on his thinking that the economy is in a new, low-productivity and low-growth regime.
Williams’s comments come ahead of next week’s symposium hosted by the Kansas City Fed in Jackson Hole, Wyo., where top global central bankers and economic thinkers will gather to discuss how to design resilient monetary policy.
For central banks, the long-standing mantra of targeting a low inflation rate is no longer appropriate in an era of low interest rates, Williams wrote.
“There is simply not enough room for central banks to cut interest rates in response to an economic downturn when both natural rates and inflation are very low,” he said in the essay.
The Fed adopted its two percent inflation target in January 2012.