UPDATE 1-Fed's Williams says grappling with economic markers for policy

Thu Nov 15, 2012 1:11am EST

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By Ann Saphir

SAN FRANCISCO Nov 14 (Reuters) - San Francisco Federal Reserve President John Williams said on Wednesday he is still grappling with the question of whether the U.S. central bank could make monetary policy more effective by tying it to specific economic markers.

Chicago Fed President Charles Evans has pushed for adopting such markers for more than a year, arguing that the Fed should vow to keep rates low until unemployment falls below 7 percent, as long as inflation does not threaten to top 3 percent.

On Tuesday, Fed Vice Chair Janet Yellen - who used to be Williams' boss at the San Francisco Fed - voiced strong support for adopting so-called numerical thresholds for policy change.

Minutes of the Fed's latest meeting, released on Wednesday, show officials favor such an approach. [ID: L1E8MEA8X]

In a sign that policymakers remain divided, Williams - who has long said he would prefer to describe monetary policy in terms of economic conditions - said he worries about pinning policy to a single number, like a 7 percent threshold for unemployment.

"People might think we are targeting 7 percent unemployment, or they think that the moment the rate falls to 7 percent the Fed will raise rates," Williams said.

Instead, the Fed would want to make sure the threshold is understood as a level at which the central bank would consider a policy change in the context of the outlook for the jobs market, inflation, and other factors, he said.

The Fed now says it expects to keep rates low through at least mid-2015.

Using a date to guide policy expectations "has been a very effective way to communicate a simple message," Williams said.

"If you have something that's basically working, you can take some time to come up with a really good replacement, if we can find one."

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