Williams backs new Fed approaches to targeting inflation

(Reuters) – An influential Federal Reserve policymaker appears to want the Fed to adopt wholesale changes to the way the U.S. central bank targets inflation, urging a new framework that would encourage higher prices and provide more flexibility in economic downturns.

New York Fed President John Williams (NYSE:) did not comment on current interest rate policy on Friday. Instead he waded into a debate that has just began: the U.S. central bank announced this month it will conduct an extensive review of its policy framework and consider alternative approaches.

Williams, who has long favored changes, said the Fed faces “significant challenges” in a world in which so-called neutral, or equilibrium, interest rates have been falling for years in part because people live longer and productivity has generally slipped.

The Fed currently uses a flexible inflation-targeting strategy in which it always attempts to hit a 2-percent target. Prices are generally at target now and they did not stray too far below or above even through the last recession and recovery.

Yet inflation expectations could slip over time if the Fed is repeatedly forced to cut rates to near zero as it did for seven of the last 10 years, Williams said.

Williams said this was like “always swimming upstream, fighting a current of too-low inflation expectations that interferes with achieving the target inflation rate.”

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