Fed’s Williams Says Central Banks Should Prepare for Slow Growth

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Monetary policy makers around the world should review their strategies to prepare for a future of slow economic growth and low interest rates, Federal Reserve Bank of New York President John Williams said.

“Central banks should revisit and reassess their policy frameworks, strategies, and toolkits, to maximize efficacy” in a world where low investment and high savings put a lid on interest rates, Williams said Tuesday in remarks prepared for a panel discussion in Zurich. “Absent such changes, central banks will be severely challenged to achieve stable economies and well-anchored inflation expectations.”

Williams pointed to a review the Fed is undergoing this year of its own monetary policy strategy. While the unemployment rate is at a five-decade low, inflation is also still below the Fed’s 2% target, as it’s been throughout most of the current expansion, and survey measures of inflation expectations are sliding too.

Fed officials have kept rates on hold since December amid low inflation and global growth concerns, which could return to the fore following an escalation in trade tensions between the U.S. and China. Investors now see a good chance of a rate cut later this year.

“Given the limited policy space for interest rate cuts in future downturns, recoveries will be slow and inflation below target,” Williams said. “The limitation in the ability of central banks to offset downturns results in an adverse feedback loop, whereby expectations of low future inflation drag down current inflation and further reduce available policy space.”

The New York Fed chief also called for fiscal policy changes to help combat future economic downturns, like stronger automatic stabilizers and greater coordination between the Fed and Treasury on debt management.

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Robert Jameson

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