Inflation-targeting works, but other methods may be more effective: Fed’s Williams

(Reuters) – A top Federal Reserve policymaker on Friday said global central banks have had good success with inflation-targeting, but should consider other methods that may work better in the face of low interest rates and the risk of asset bubbles.

While San Francisco Fed President John Williams was careful to say he was not advocating either of the approaches he discussed – price-level targeting and nominal-income targeting – both imply even easier monetary policy than what the Fed has used as it has battled low inflation since the Great Recession.

His comments came just two days after the U.S. central bank ended its controversial bond-buying stimulus and upgraded its assessment of the labor market, laying the groundwork for the Fed to tighten monetary policy sometime next year.

Williams is seen as a centrist policymaker whose views are largely aligned with Fed Chair Janet Yellen. His remarks, prepared for delivery to a conference held at the South African Reserve Bank, did not include comments on his outlook for the U.S. economy or monetary policy.

Most major central banks, including the Fed, currently aim at a longer-term inflation rate of 2 percent to 3 percent.

That approach, first adopted 25 years ago by New Zealand’s central bank, has been “remarkably successful at providing a nominal anchor and keeping inflation low and relatively stable during a period of severe turbulence,” Williams said. “Nonetheless, recent events have revealed some chinks in the armor of inflation targeting.”

Boosting inflation to acceptable levels is hard to pull off when interest rates are near zero, he said, as they are now and as they may be more often in the future, given slowdowns in productivity and other drags on economic growth.

That has been an ongoing challenge in the United States, where inflation has lingered below the Fed’s 2-percent target for years, despite the central bank’s extraordinarily accommodative monetary policy.

A second challenge is the ongoing risk of housing, debt, or other bubbles fueled by low interest rates. While central banks may want to raise rates to protect against such risks, he said, doing so would also lower inflation, a potentially costly move if inflation expectations are already low.