It’s almost time for the Federal Reserve to stop holding the market’s hand.
That’s the message from John Williams, president of the Federal Reserve Bank of San Francisco, who takes the helm of the central bank’s powerful New York branch on June 18.
In an interview on Tuesday, he said he thinks the time is approaching to phase out forward guidance -- the nearly decade-old practice of pledging continued easy monetary policy. The strategy was used to calm investors in the depths of the financial crisis, and the Fed continues to say rates will remain below levels likely to prevail over the longer run, even as it lifts borrowing costs to prevent overheating.
“We can’t keep talking about policy normalization once we’re around what we think of as a neutral interest rate,” Williams said in Minneapolis, referring to the level of interest rates that neither slows nor speeds up the economy. “So I think this forward guidance, at some point, will be past its shelf life.”
Williams’ views on this -- and all things monetary policy -- are about to get more important. Together with Chairman Jerome Powell and the Fed vice chairman, the New York Fed president has traditionally been part of a leadership trio that steers the Federal Open Market Committee’s policy options. Williams is a centrist who backs its gradual approach to policy tightening, so his promotion reinforces continuity on the FOMC.
Fed’s Williams Says Three to Four Hikes Still Warranted in 2018
He isn’t alone in thinking that the communication approach might be due an update. The Fed’s most recent minutes showed that some participants suggested that policy would move from easy to neutral or even restraining, which could require revising the Fed’s statement. The language currently states that “the stance of monetary policy remains accommodative” and that “with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.”
The Fed’s target range for its overnight policy rate is currently 1.5 percent to 1.75 percent, while officials view 2.9 percent as neutral, according to their median estimate in March.
Williams says the best way to move away from the commitments implied by such language in the statement is to explain how the central bank will respond to economic developments.
“We probably need to do more work on communicating our reaction function, and not spending so much time trying to communicate our forward guidance,” he said. That could mean a more explicit explanation of the Fed’s quarterly Summary of Economic Projections, which includes its dot plot forecasts of future interest rates, he said. That probably wouldn’t happen anytime soon.