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Fed's Williams says moderate inflation overshoot acts as 'guard rail'

FILE PHOTO: John C. Williams, president and CEO of the Federal Reserve Bank of New York speaks to the Economic Club of New York in the Manhattan borough of New York, U.S., March 6, 2019. REUTERS/Lucas Jackson

(Reuters) - The Federal Reserve’s new pledge to keep interest rates at zero until inflation is on track to “moderately” exceed 2% has come under fire for being overly vague and leaving too much up to U.S. central bankers’ judgment, but that is exactly the point, a key author of the pledge said on Wednesday.

“Moderate isn’t a number ... it’s a guard rail” against expectations that the Fed would tolerate very high or persistently high inflation, New York Fed President John Williams said at a virtual conference held by the Hoover Institution. “It’s also about proportionality,” he added, adding that if the undershoot on the target has been by a few tenths of a percentage point, the overshoot ought to be balanced against that.

“There’s flexibility, and there’s some discretion around that,” Williams said. “It is specific to the circumstances, and I would also say it is specific to where the economy is.”

Asked why the Fed’s new policy guidance focused on interest rates rather than the balance sheet, Williams said the Fed is purchasing “an extremely high level of assets already ... It’s not the case that we are not using this tool.”

The Fed has said it will continue to buy “at least” $120 billion a month in Treasuries and mortgage-backed securities to help keep financial conditions easy and to boost the economy.

Reporting by Ann Saphir in Berkeley, Calif.; Editing by Leslie Adler and Matthew Lewis

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