Black Friday Sale! Save huge on InvestingProGet up to 60% off

Fed's Williams urges new policies to combat low interest rates

Published 15/08/2016, 18:06
© Reuters. The Federal Reserve Building in Washington

SAN FRANCISCO (Reuters) - Central bankers and governments must come up with new policies to buffer their economies against persistently low interest rates that threaten to make future recessions deeper and more difficult to avoid, a top Federal Reserve official said on Monday.

Setting higher inflation targets, tying monetary policy directly to economic output, instituting government spending programs that automatically kick in during economic downturns, and boosting investment in education and research are all policies that should be considered, San Francisco Fed President John Williams said.

Without such changes, Williams warned, policymakers will find themselves hamstrung.

"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," Williams said in the latest issue of his regional Fed bank's Economic Letter.

Williams' push for broad policy change well beyond the writ of the central bank is not unprecedented -- Fed Chair Ben Bernanke used to regularly admonish lawmakers to get their fiscal house in order.

But the timing of Williams' call, in the midst of a U.S. presidential election where economic policy is taking centre stage, is noteworthy given central bankers' usual penchant for keeping a low political profile, particularly as both candidates say they want big changes at the Fed.

Globally, central bankers have been frustrated at the persistence of low growth and inflation even after years of super-easy monetary policy.

Policymakers like Williams have become convinced that factors beyond their control, including an aging population and sluggish productivity gains, are braking growth.

That in turn is keeping interest rates from rising as far or as fast as in the past; Williams on Monday estimated U.S. short-term rates would likely rise only to 3 percent or 3.5 percent even after the economy regains full health, and perhaps not even that.

Williams floated two monetary policy changes to cope with lower rates: raising the Fed's current 2-percent inflation goal, or replacing its current inflation-targeting regime with some form of nominal GDP targeting. Both approaches, he said, would give the Fed more scope to lower interest rates in response to downturns. Both, however, could have costs.

But Williams also called for changes to fiscal policy, perhaps tying tax rates or government spending to unemployment rates. Doing so, he said, would allow "predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries."

© Reuters. The Federal Reserve Building in Washington

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.