The head of the San Francisco Federal Reserve is challenging both the central bank and the federal government to think outside of the proverbial box when it comes to formulating economic policies.
In commentary published by his institution’s Economic Letter, San Francisco Fed President and CEO John C. Williams bluntly insisted that the status quo has become stagnant as the national and global economic environments have shifted.
“Central banks and governments around the world must be able to adapt policy to changing economic circumstances,” he wrote. “The time has come to critically reassess prevailing policy frameworks and consider adjustments to handle new challenges, specifically those related to a low natural real rate of interest. While price level or nominal GDP targeting by monetary authorities are options, fiscal and other policies must also take on some of the burden to help sustain economic growth and stability. As nature abhors a vacuum, so monetary policy abhors stasis. Instead of being a rigid set of precepts, it follows the adage, that which survives is that which is most adaptive to change.”
Williams added that the Fed’s decision to keep rates at historic lows will ultimately create more problems than solutions.
“The critical implication of a lower natural rate of interest is that conventional monetary policy has less room to stimulate the economy during an economic downturn, owing to a lower bound on how low interest rates can go,” he continued. “This will necessitate a greater reliance on unconventional tools like central bank balance sheets, forward guidance, and potentially even negative policy rates. In this new normal, recessions will tend to be longer and deeper, recoveries slower, and the risks of unacceptably low inflation and the ultimate loss of the nominal anchor will be higher.”
Williams also insisted that any changes would have to come gradually and in a manner that ensured there was no tumult created in sudden shifts.
“In stressing the need to study and consider new approaches to fiscal and monetary policy, I am not advocating an abrupt reversal of course; after all, you don’t change horses in the middle of a stream,” he stated. “And in monetary policy, ‘abrupt’ and ‘disrupt’ have more than merely resonance of sound in common. But now is the time for experts and policymakers around the world to carefully investigate the pros and cons of these proposals.”
