NEW YORK--Federal Reserve Bank of San Francisco President John
Williams said on Friday that central banks' largely successful
pursuit of low inflation could mean they more frequently run into
periods where monetary policy hits levels of interest rates that
can't be cut further.
At issue is what central banker's call the zero lower bound, or
the point at which the central bank's short-term interest rate has
been cut to near zero. The Fed has been mired at this level since
the end of 2008 and is broadly expected to remain there until the
middle of next year.
To provide additional support, the Fed, like other central
banks, has had to pursue unorthodox strategies to provide
additional stimulus once more interest rate cuts were off the
table.
Mr. Williams said flirting with this level of monetary policy
could come hand-in-hand with success in keeping inflation low.
"Based on the broader historical experience and potential for a
lower level of the natural rate of interest, the [zero lower bound]
is likely to be a recurring issue for central banks that target low
levels of inflation," Mr. Williams said.
The officials' remarks came from the text of a speech that was
prepared for delivery before a conference on inflation targeting
held by the South African Reserve Bank in Pretoria, South Africa.
He spoke in the wake of this week's monetary-policy-setting Federal
Open Market Committee meeting, but didn't comment on the U.S.
outlook.
Instead, he devoted the bulk of his remarks to taking stock of
the broad success enjoyed by the many central banks around the
world that have set inflation targets and worked to achieve the
desired level of price pressures. The Fed has a 2% inflation
target, although it is also charged by Congress to pursue maximum
sustainable employment, creating what's called a dual mandate.
Mr. Williams explained the challenge facing central banks is one
of a changing economic landscape. On one side, many economies are
likely to need a lower average interest rate to keep inflation at
bay. On the other, downturns of a severity rivaling the troubles
seen over recent years aren't as uncommon as many believe. "A broad
view of history teaches us that very large downturns are not only
possible, they are common," he said.
Past central-bank success at lowering inflation expectations,
which in turn allow central banks to keep interest rate targets
lower than they were historically, means there is less room to cut
rates when deep economic trouble appearance and calls for an easier
money stance.
"It is too early to judge whether this downward shift in the
natural [interest] rate will endure," Mr. Williams said. But, "if
it does, then it raises the specter of the [zero lower bound] being
a more frequent problem than in past decades when the natural rate
of interest was higher," given the omnipresent threat of an
economic downturn, he explained.
Write to Michael S. Derby at michael.derby@wsj.com
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