Federal Reserve Chair Jerome Powell’s top deputies are edging toward a clash that could shape the pace of interest-rate hikes in coming months, as well as how the Fed should prepare for and combat the next economic downturn.
San Francisco Fed President John Williams launched a critical salvo in the debate on Tuesday with a speech underscoring his view that the Fed has only a few more rate hikes ahead of it before rates reach a level of borrowing costs that allows the economy to coast along, without stimulating or slowing its progress.
Williams for his part on Tuesday called bond-buying an important part of the policy-easing tools that the Fed “is going to have to turn to” to fight future downturns.
Williams has also said that “time is pressing” for a rethink of the Fed’s 2 percent inflation target. A new policy framework, he has said, conceivably could give the central bank more room for maneuver even with a low neutral rate by allowing it to defer rate hikes after a recession even if inflation pushes up to, or even past, its long-run target.
His view contrasts with recent optimism from some economists and central bankers. Among them is the Fed vice chair for financial supervision, Randal Quarles, a Trump administration appointee who in February said he believed there is a “real possibility” that the economy could shift to a higher growth trajectory.
Quarles’ view suggests that the Fed has a bit more room to raise rates without braking the economy, which would in turn give it the flexibility to cut rates more deeply in the next downturn, and perhaps avoiding the need for unconventional measures like bond purchases.
Fed Board nominee Richard Clarida, at his confirmation hearing on Tuesday, flagged some discomfort with such measures, which began in the depths of the financial crisis to stabilize banks and were later were expanded to help bring down high unemployment and lift excessively low inflation.
Though the Fed’s initial program of so-called quantitative easing “made sense,” Clarida said he was not sure how he would have voted on subsequent rounds, and said in response to a question from Republican Senator Pat Toomey that he was “very sympathetic to your view that any discussion and thinking about QE would have to take a serious look at costs as well as benefits.”
Reference: Reuters
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