Fed’s Williams: New Framework Strengthens Fed Hand

The Fed’s new policy framework targeting average inflation over time puts the central bank in a stronger position to meet its employment and inflation goals, New York Fed President John Williams said Wednesday.

“The new framework statement directly and effectively addresses the problems caused by a low neutral rate and persistently low inflation,” Williams said during an online appearance with the Bretton Woods Committee.

“The statement makes unequivocally clear that we seek maximum employment and will aim to eliminate shortfalls from this broad and inclusive goal,” Williams said. “It positions us for success in achieving our maximum employment and price stability goals in the future,” he said.

Separately, in a response to a question, he said the Fed’s aggressive intervention in financial markets to ensure liquidity in response to the pandemic shock “is what central banks are for”. He added that the creation of multiple special facilities and the ongoing availability of liquidity as a backstop continued to stabilise markets.

In response to another question, Williams downplayed concern about heavy government borrowing on the outlook for interest rates or as a constraint on the Fed’s independence. He repeated that fiscal support remained key to help businesses and families weather the pandemic.

“The topic of raising interest rates is so far off in the future, I am not going to focus on that now,” he said.

Asked whether the Fed would adjust the average weighted maturity of its holdings of US Treasuries, Williams said no decision had been made, and that the Fed would calibrate the use of all its policy tools as needed.

Williams did not directly address a question about the Fed’s level of concern that impaired loan portfolios make banks vulnerable, given the pandemic’s impact on the commercial real estate market. He said it is “clearly an area of focus” to monitor how banks are managing these risks.


Julie Ros

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