NY Fed chief: Uncertainty will remain in monetary policy

According to John C. Williams, President and CEO of the Federal Reserve Bank of New York, uncertainty will remain the defining feature of the monetary policy landscape for central banks for the foreseeable future.

“This is especially true as we face issues such as artificial intelligence, climate change, globalization, and innovations in the financial system,” Williams said in his letter — mentioning the perennial challenges of measuring so-called star variables like the R-star. Is not being done.” Remarks at the Suresh Tendulkar Memorial Lecture organized by the Reserve Bank of India in Mumbai.

The R-star is the short-term interest rate that would apply when the economy is at full employment and stable inflation.

The New York Fed chief said inflation is skyrocketing around the world due to global supply-chain disruptions, as well as a sharp imbalance between supply and demand due to Russia’s war on Ukraine.

Inflation began to rise in 2021, rising by more than 7 percent in the US in June 2022, the highest rate recorded in more than 40 years. It followed a similar pattern in most OECD economies.

“But its trajectories differed across Asia. For example, in India, inflation was mainly due to rising food prices.

“Although there are important differences in the sources of inflation, many central banks, including the Reserve Bank of India, have faced the same issue: how to restore price stability at a time when many parts of our economy are rotating in unpredictable ways. ?” Williams said.

The Federal Reserve restored price stability by relying on the central principles of inflation targeting practiced in the US and many other countries.

One of the principles of restoring price stability is that central banks should take responsibility for providing price stability and have the freedom to act to achieve it.

“History has taught us that when central banks are accountable and independent they can be more successful in achieving sustained low inflation.

“Today, regardless of economic shocks, changes in fiscal policy, or the vicissitudes of globalization and de-globalization, central banks believe it is their job to achieve and maintain price stability,” the NY Fed chief said.

The second principle that helped the US Fed manage the known unknowns is transparency – which includes the central bank’s strategy, clear communication of policy decisions, and a clear numerical long-term inflation target.

“For central banks, transparency increases accountability and keeps them clearly focused on achieving their goals. For households and businesses, a clear and credible inflation target helps remove some of the uncertainty so they can focus on planning for their future without worrying about inflation,” Williams said.

Referring to the current inflation reading of about 2-1/2 percent, he underlined that the Fed has seen significant progress in bringing it down.

“But we have a way to go to reach our 2 percent target on a sustained basis. We are committed to getting the job done,” he said.

The third major principle of well-controlled inflation expectations has become the basis of modern central banking, as economic analysis and history have shown that controlling inflation expectations is important to maintaining low and stable inflation.

While the core principles of inflation targeting have served the US Fed well in managing the extreme shocks and uncertainty of the past four and a half years, Williams said that “uncertainty does not simply remain in the past.

“Despite the best efforts of economists and others to understand how the economic environment is changing and what it means for monetary policy, we must accept that uncertainty will continue to define the future.”

These principles and lessons provide a strong foundation for monetary policy that is robust to uncertainty.