Fed’s Williams calls for global rethink of monetary policy

By Ann Saphir

SAN FRANCISCO (Reuters) – Global central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy, San Francisco Fed President John Williams said Thursday, warning that to fight the next recession, as with the last, they would need to do more than just cut interest rates.

Other Fed officials, including Chicago Fed Bank President Charles Evans, have in recent days urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

With many major economies facing slower growth and thus lower interest rates even when unemployment is low, central banks will need to find ways to stimulate their economies that work even when many other countries are also trying to boost their growth.

“We will all be better able to contain the next economic recession if we develop approaches that succeed even when many countries are simultaneously constrained by the lower bound,” Williams said at the opening of a two-day conference on Asian economic policies at the San Francisco Fed. “And that means taking into account the nature of monetary policy spillovers.”

Strategies that central banks should consider including not only the bond-buying and forward guidance used widely in the last recession, but also negative interest rates that was used in some non-U.S. countries, as well as untried tools including so-called price-level targeting or nominal-income targeting. Central banks may also want to consider setting a higher inflation target, he said.

“Each of these alternatives has significant advantages and disadvantages, which need further careful study and discussion,” Williams said.

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