Fed’s Williams defends central bank’s new average inflation targeting policy against criticism

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New York Federal Reserve Chairman John Williams on Wednesday defended the central bank’s new inflation strategy against critics who say it is preventing the central bank from taking obvious steps to bring back fresh prices.

“Have the fundamental factors that prompted us to change our framework changed? Do I think they have changed? The answer is very clearly no, ”Williams said in a virtual discussion sponsored by the European Commission.

In the fall of 2019, well before the pandemic, the Fed adopted a strategy called “flexible average inflation targeting” to allow inflation to “overshoot”. While the Fed has maintained its inflation target which averages 2% over time, it has said it will allow periods of higher inflation to offset periods of below-target inflation. . Some economists have said that in essence the Fed is increasing its inflation target to 2.5%.

As inflation has skyrocketed this year, criticism of the Fed’s new strategy has also mounted. The increase in consumer prices now exceeds 6%, the highest level in 30 years.

In a Thursday column, Martin Wolf, the famous economic correspondent for the Financial Times, called the new Fed executive nonsense.

“It never made sense to me that the world’s largest central bank would react to its past failures by deliberately making opposite mistakes in the future,” Wolf wrote.

Wolf added that the Fed’s decision to keep monetary policy locked in the same parameters introduced in March 2020 “seems extremely inappropriate.”

At a conference sponsored by the Cato Institute on Thursday, Raghuram Rajan, the former head of India’s central bank and now a professor at the University of Chicago’s Booth School of Business, said the new Fed executive appeared to have caused a change in behavior since the time. – honored means of fighting inflation.

In the past, when the Fed saw inflation, whatever the cause, “they would stand in front of microphones, straighten up and say ‘we hate inflation, we will do something fast’,” Rajan said. .

This time, central bankers are making excuses for the inflation, calling it transient and saying it will go away, he added.

“The behavior of the past now seems aggressive. And there is a risk that we will have “the wrong framework for the wrong regime” if the global economy moves away from an era of low inflation, he added.

In his remarks, Williams said the goal of the Fed’s new strategy is to anchor inflation expectations to the 2% target. Following the 2008 financial crisis, financial markets have come to expect inflation to be below 2%, which is helping to maintain sluggish economic growth.

Williams acknowledged that the United States is seeing a larger rise in inflation. this year and it’s not just a few special categories.

“We have certainly seen a recovery in core inflation in the United States which we are studying carefully,” said Williams.

Williams said investor and market expectations for long-term inflation had risen significantly, which he called a positive development.

“But you wouldn’t want those longer-term inflation expectations to increase dramatically,” he added.

Williams said the Fed was facing “a very unique set of circumstances.”

Demand is high for goods and services and supply constraints are a factor in the labor market and shipping.

“I think our framework is well suited for that, because that’s where we really want to make sure that inflation expectations are well anchored at 2%,” he said.

“We just have to do what we always do – which is to make sure that we are doing our best to achieve those goals. [of stable prices and maximum employment] systematically, ”he added.

The good news is that the economy is “coming back in force and” improving more quickly, “Williams said.

However, the economy is still grappling with the negative effects of the pandemic. And high inflation is very difficult – especially for people on fixed incomes, he said.

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