On Thursday, January 9, New York Fed President John Williams spoke at the Bank of England about the future of monetary policy frameworks, and what that means for inflation targeting.
He said:
“[I]nterest rates and inflation are going to stay lower than we’ve come to expect in the past. This means that monetary policy will likely be more frequently constrained by the lower bound, or LB for short, creating a set of challenges for policymakers.”
“As I peer into the future, the question is not so much what is wrong with inflation targeting, but rather what we need to preserve and, in fact, strengthen it.”
“Any evolution of the current framework should involve doubling down on fundamental principles that have proven to be successful.”
In his remarks, President Williams said “Low r-star and declining inflation expectations are clear indicators of what’s to come.” He pointed to “demographic changes, slow productivity growth, and demand for safe assets” as drivers of low r-star and low inflation.
He said that inflation targeting had been remarkably successful at bringing inflation down and keeping it low and stable. But global trends mean that “central banks are pondering… how to prevent inflation from being too low.”
“Any evolution of the current framework should involve doubling down on fundamental principles that have proven to be successful,” he said. He noted “three fundamental elements of inflation targeting that will be crucial as central banks work to prevent inflation from drifting too low: well-anchored inflation expectations, accountability, and transparency.” He highlighted anchoring inflation expectations as the most critical element. He noted that “If inflation is sustained at target levels consistently, a further downward trend in expectations can be forestalled.”
President Williams concluded on an optimistic note, saying, “As long as we double down on the fundamentals of inflation targeting by anchoring inflation expectations at the target level, holding ourselves accountable to delivering on our objectives, and being transparent about our actions, we will be well positioned to handle whatever the future might bring.”
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
