Williams Says New Fed Plan to Meaningfully Improve Efficacy

(Bloomberg) -- The Federal Reserve’s new strategy of taking a less preemptive approach toward warding off inflation will meaningfully improve its ability to foster maximum employment and stable prices, New York Fed President John Williams said.

The shift “directly and effectively addresses the problems caused by a low neutral rate and persistently low inflation,” Williams said Wednesday in remarks prepared for a virtual event. “These changes are mutually reinforcing and will meaningfully improve our ability to achieve both of our dual mandate goals in an environment of a very low neutral rate.”

Fed Chair Jerome Powell unveiled the new plan during an annual economic symposium on Aug. 27. Going forward, the U.S. central bank will allow inflation rate to rise above its 2% target following periods of below-target inflation with an aim toward averaging 2% over time. That means waiting longer to tighten monetary policy as inflation rises than in the past.

Officials slashed their benchmark interest rate to nearly zero at the onset of the coronavirus pandemic in March and said they wouldn’t begin raising it again until the economy was “on track” to achieving maximum employment and 2% inflation. Investors are on the lookout to see whether or not Powell and his colleagues will update that guidance to reflect the new strategy at their upcoming Sept. 15-16 policy meeting.

Williams offered few clues as to whether they would. While answering a question about fiscal sustainability during the event, he said higher interest rates might affect government finances on the margin, but “even the topic of raising interest rates is so far off in the future that I’m not going to focus on that right now.”

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