MNI POLICY: Fed Williams: Should Reassess Inflation Framework

By Jean Yung

     WASHINGTON (MNI) - With little room to cut interest rates should another

crisis hit the U.S. economy, the Federal Reserve should reevaluate its

strategies for hitting its 2% inflation target, New York Fed President John

Williams said. 

     "What can we do to prepare ourselves and our economies for the next

crisis?" he said in remarks prepared for the Council on Foreign Relations in New

York. "Starting with monetary policy, central banks should reassess their

strategies, goals, and the tools they use to achieve them. This might include

things like reassessing how we achieve our 2% goal." 

     Inflation that's too low is "now a more pressing problem" following the

financial crisis, he said, on the heels of a two-day Fed conference to reassess

its policy framework. Aging demographics and slow productivity growth translate

to slower trend growth, while an abundance of savings and a decline in demand

for savings resulting from slower trend growth lead to lower interest rates, he

said. 

     That poses challenges for monetary policymakers. 

     "When interest rates are low, central banks don't have much room to

maneuver to deal with a crisis" before hitting zero, he said. Negative rates

"bring with them a separate set of challenges." 

     Future recoveries will be slow, accompanied by low inflation, which creates

a "vicious circle" where expectations of low inflation drag down current

inflation. 

     Outside of monetary policy, Williams said fiscal policies such as

"automatic stabilizers," which reduce taxes to stimulate growth without formal

legislation, could support the economy. As well, regulation could shore up

financial stability, he said. 

     Williams did not mention in his speech the current economic outlook or the

ongoing trade negotiations which have roiled markets in the past week. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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