MNI POLICY: Williams: Review Focus On Inflation Expectations

By Evan Ryser

     WASHINGTON (MNI) - Any move by the Federal Reserve to adapt its framework

to allow inflation to run above target for a time would abide by key principles

including those of well-anchored inflation expectations, accountability, and

transparency, New York Federal Reserve President John Williams said Thursday.

     "Any evolution of the current framework should involve doubling down on

fundamental principles that have proven to be successful," Williams said.

     Williams, a voter on the Federal Open Market Committee, said that while

inflation targeting has been remarkably successful at keeping inflation low and

stable for decades, estimates now of the neutral real rate of interest are only

around half a percent in the United States, lower than at any time before the

Great Recession.

     "One key takeaway from these global trends is that interest rates and

inflation are going to stay lower than we've come to expect in the past,"

meaning that monetary policy will more frequently be constrained by the lower

bound," Williams said in a panel at the Bank of England.

     Recent work using the New York Fed's Survey of Consumer Expectations shows

a decline in longer-run inflation expectations by nearly half a percentage point

over the last six years, to about 2.25%, he said.

     Fed officials are moving into the advanced stages of a more-than-year-long

review of their monetary policy framework. The FOMC will not reaffirm its Longer

Run Goals and Monetary Policy Strategy statement at the January meeting, instead

choosing to revisit it closer to the conclusion of its framework review

mid-year, minutes released last week from the December FOMC said.

     Fed officials have ruled out raising the Fed's 2% inflation target, but

have publicly discussed various make-up strategies. Williams has advocated for

price level targeting.

     In London, Williams noted support for forward guidance as a tool, saying:

"Keeping inflation expectations anchored at the right point will depend not just

on policymakers holding themselves accountable for inflation, but on their

ability to clearly execute and communicate their policies."

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

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