June 6, 2019 / 5:04 PM / in 12 days

Fed's Williams says excessively low inflation a pressing problem

FILE PHOTO: John C. Williams, president and CEO of the Federal Reserve Bank of New York speaks to the Economic Club of New York in the Manhattan borough of New York, U.S., March 6, 2019. REUTERS/Lucas Jackson

NEW YORK (Reuters) - An aging population and slowing productivity growth are pushing down the level of interest rates that a healthy economy can withstand, creating challenges for the Federal Reserve in fighting the next downturn, an influential U.S. central banker said Thursday.

“When interest rates are low, central banks don’t have much room to maneuver to deal with a crisis,” New York Fed President John Williams said in remarks prepared for delivery to the Council on Foreign Relations in New York.

With less Fed firepower, economic recoveries will likely be slower, dragging down on inflation which if persistent can lower expectations for future inflation and put further downward pressure on current inflation, he said.

“If inflation falls, central banks will have even less room to maneuver when faced with a slowdown,” Williams said. “While I will always be vigilant about inflation that’s too high, inflation that’s too low is now a more pressing problem.”

Williams did not use his prepared remarks to address whether he views the Trump administration’s latest threat of trade tariffs as enough to set the stage for a potential Fed rate cut, as a few of his colleagues have suggested.

In late May, before the latest escalation in trade tensions, Williams had said interest rates were in the right place.

Williams used his prepared remarks to stump for central banks to review their goals and strategies to better prepare for future downturns, as the Fed is currently doing. He also called for fiscal authorities to put in place their own policies, such as automatic stabilizers that would automatically cut taxes in a downturn to stimulate growth.

Reporting by Ann Saphir; Editing by Chizu Nomiyama

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