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 While San Francisco Fed President John Williams was careful to say
he was not advocating either of the approaches he discussed -
price-level targeting and nominal-income targeting - both imply even
easier monetary policy than what the Fed has used as it has battled
low inflation since the Great Recession.
His comments came just two days after the U.S. central bank ended
its controversial bond-buying stimulus and upgraded its assessment
of the labor market, laying the groundwork for the Fed to tighten
monetary policy sometime next year.
Williams is seen as a centrist policymaker whose views are largely
aligned with Fed Chair Janet Yellen. His remarks, prepared for
delivery to a conference held at the South African Reserve Bank, did
not include comments on his outlook for the U.S. economy or monetary
policy.
Most major central banks, including the Fed, currently aim at a
longer-term inflation rate of 2 percent to 3 percent.
That approach, first adopted 25 years ago by New Zealand's central
bank, has been "remarkably successful at providing a nominal anchor
and keeping inflation low and relatively stable during a period of
severe turbulence," Williams said. "Nonetheless, recent events have
revealed some chinks in the armor of inflation targeting."
Boosting inflation to acceptable levels is hard to pull off when
interest rates are near zero, he said, as they are now and as they
may be more often in the future, given slowdowns in productivity and
other drags on economic growth.
That has been an ongoing challenge in the United States, where
inflation has lingered below the Fed's 2-percent target for years,
despite the central bank's extraordinarily accommodative monetary
policy.
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A second challenge is the ongoing risk of housing, debt, or other
bubbles fueled by low interest rates. While central banks may want
to raise rates to protect against such risks, he said, doing so
would also lower inflation, a potentially costly move if inflation
expectations are already low.
Given those two challenges, he said, price-level targeting and
nominal-income targeting "may have some advantages" over inflation
targeting, he said. Under price-level targeting, a central bank
allows inflation to run hot for a time to make up for periods when
the economy labored under too-low inflation.
Under nominal-income targeting, the Fed targets a path for GDP. Both
approaches can protect against debt-fueled booms and busts, he said.
Still, he said, "it's too early to judge" whether either would be
better than inflation targeting, and they could have unintended
negative consequences or could be difficult to carry out because
they are hard to explain.
(Writing by Ann Saphir; Editing by Chizu Nomiyama)
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