NY Fed Chief Open to New Inflation Targeting

An influential Federal Reserve policymaker appears to want the Fed to adopt wholesale changes to the way the U.S. central bank targets inflation, urging a new framework that would encourage higher prices and provide more flexibility in economic downturns.

New York Fed President John Williams did not comment on current interest rate policy on Friday. Instead he waded into a debate that has just began: the U.S. central bank announced this month it will conduct an extensive review of its policy framework and consider alternative approaches.

Williams, who has long favored changes, said the Fed faces “significant challenges” in a world in which so-called neutral, or equilibrium, interest rates have been falling for years in part because people live longer and productivity has generally slipped.

The Fed currently uses a flexible inflation-targeting strategy in which it always attempts to hit a 2-percent target. Prices are generally at target now and they did not stray too far below or above even through the last recession and recovery.

Yet inflation expectations could slip over time if the Fed is repeatedly forced to cut rates to near zero as it did for seven of the last 10 years, Williams said.

Williams said this was like “always swimming upstream, fighting a current of too-low inflation expectations that interferes with achieving the target inflation rate.”

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza