BY JONNELLE MARTE
Lower interest rates around the globe make it more difficult to use monetary policy to stimulate the economy, but the Federal Reserve’s new framework leaves the U.S. central bank better positioned to hit its goals on inflation and employment, New York Federal Reserve Bank President John Williams said on Wednesday.
The U.S. central bank announced a new strategy last week to target an average rate of inflation over time. The approach makes it clear that temporarily higher inflation is “desirable” to reach the average inflation target, and it clarifies that the Fed is focused on shortfalls in employment, Williams said in remarks prepared for the Bretton Woods Committee Webinar.
“These changes are mutually reinforcing and will meaningfully improve our ability to achieve both of our dual mandate goals in an environment of a very low neutral rate,” Williams said.
While the Fed has previously reached its target of 2% inflation, sustaining inflation at that level has been a challenge, Williams said.
The new strategy puts an end to the previous approach of worrying preemptively about inflation, and emphasizes supporting the labor market, Williams said.
But when it comes to figuring out exactly how the strategy will affect monetary policy, Williams echoed remarks from some of his colleagues over the past week that policy will not be based on an exact formula.
“How it translates into actual monetary policy depends on the circumstances,” Williams said while answering questions from former New York Fed president Bill Dudley. Williams added that the Fed is not focused on any specific rate of unemployment but looking at a range of indicators.
He also said rates will remain low for a while.
“Even the topic of raising interest rates is so far off in the future,” Williams said.