NEW YORK (Reuters) - One of the Federal Reserve’s experts on navigating a world of low inflation and economic growth said on Friday the U.S. central bank should seriously consider ditching its old policy framework for a new approach to hitting its price-level goal.
In a speech, San Francisco Fed President John Williams did not comment specifically on interest rate hikes or on recent economic activity.
Instead he praised the advantages of a so-called price-level targeting regime over the Fed’s current regime of a simple 2-percent target. The central bank’s preferred inflation measure has been below this goal for some five years, though prices have recently edged higher.
“I believe that a price-level framework merits very serious consideration for central banks including the Fed,” Williams, who does not vote on policy this year under a rotation, said in a speech to the hawkish-leaning Shadow Open Market Committee.
As it stands, the central bank sets rates to keep unemployment low and to also hit 2-percent inflation as much as possible, irrespective of how long prices have lingered below or above target. On the other hand, price-level targeting would oblige the Fed to make up for years of excessively low inflation by pushing it above target for a similar period, and vice-versa.
“Baked into its very design is a ‘lower for longer’ policy prescription in response to sustained low inflation,” added Williams, who has floated a handful of new policy approaches over the last year including simply raising the inflation target.
Some economists and former Fed officials have also floated price-level targeting, though most central bankers say such a reform would provide little benefit and confuse investors and the public.
Williams, a former top advisor to Fed Chair Janet Yellen, has previously said he expects three or four rate hikes in 2017. The Fed has raised rates once so far this year.
Reporting by Jonathan Spicer; Editing by Chizu Nomiyama