Williams Says Fed Has Some Time to Debate Its Guidance on Rates

(Bloomberg) -- U.S. central bankers still have some time to ponder how to best update their public guidance on the likely future path of interest rates and whether they need to deploy a yield-curve control strategy, New York Fed President John Williams said.

“Right now, I actually think that the guidance we do have in there -- which is maybe more descriptive than formal forward guidance -- is serving us well,” Williams said Thursday during an interview with Yahoo Finance. “So, we do have some time to think about how we should evolve that guidance as we go forward.”

Fed officials are currently debating how and whether to strengthen their guidance on rates. Recent statements from the policy-setting Federal Open Market Committee have said that it plans to hold its benchmark interest rate in the current target range near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Some, like Fed Governor Lael Brainard and Philadelphia Fed President Patrick Harker, have said they are in favor of stating publicly that they will defer any rate hikes until inflation rises above the FOMC’s 2% target. The Fed’s preferred measure of inflation undershot the target for most of the last expansion, and the pandemic dealt it another blow: It sank to 0.5% in the 12 months through May.

Framework Review

The question is tied up in a review of the committee’s policy making strategy, which was launched in late 2018 but was then temporarily derailed by the coronavirus pandemic. In addition to options for strengthening guidance, policy makers are examining other strategies like yield-curve control, which central banks in Japan and Australia have deployed to pin down longer-term rates in addition to short-term ones.

Williams said such a strategy may be a potential tool the committee could use to provide monetary accommodation, though he characterized it as secondary to the guidance question.

“It would be really probably best used in a situation where we found that our forward guidance and our other communications wasn’t being as effective as we would like,” Williams said of yield-curve control. “So, I think of it as a potential tool but not necessarily a tool for any specific situation.”

The New York Fed chief said he hoped the committee would be in a position to complete the review and roll out the findings sometime this year.

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