New York Federal Reserve Bank President Calls for More Aggressive Fed Money Printing

NY Fed President John Williams

Oh boy, let the price inflation roll.

In a new staff paper, Federal Reserve Bank of New York president John Williams advocates changing the way the Fed targets inflation.

Williams criticizes the current framework for anchoring expectations below the inflation target, “which, in turn, exacerbates the deleterious effects of the lower bound on the economy”, he writes with co-author Thomas Mertens.

He provided a summary of his view in a speech at the 80th Plenary Meeting of the Group of Thirty at the New York Fed in late November. Williams said, "The problem we need to solve these days is the risk of inflation that is persistently too low, rather than too high."

In the speech, he gave two options for boosting inflation that he appeared to approve of:

“[A]verage-inflation targeting,” whereby the central bank purposefully aims to achieve an above-target inflation rate in “good” times when the lower bound is not a constraint.  Properly designed and implemented, such an overshoot can offset the inflation undershoot during “bad” times so that the longer-run average inflation rate and inflation expectations are in line with the target...[and]

[P]rice-level targeting, including its various offshoots, such as nominal GDP targeting and temporary price-level targeting.  In such a regime, the central bank commits to keep the price level near a steadily growing target path.  Like average-inflation targeting, this strategy promises to overshoot the target inflation rate in “good” times to make up for the inflation undershoot when policy is constrained.

In theory, both average-inflation and price-level targeting can solve the problem of anchoring inflation expectations at the target rate while maintaining a low inflation target rate amid low neutral rates.  Although price-level targeting is a bigger leap from inflation targeting than average-inflation targeting, each can be implemented in ways that are very similar to standard inflation targeting, either in terms of forecast-targeting or a policy rule.

Of course, it is only from a mad Keynesian aggregate demand perspective that you would want any price inflation at all. Former Fed chairman Paul Volcker in his memoir, Keeping At It: The Quest for Sound Money and Good Government, pointed out that this idea of a target price inflation rate is a new and shaky notion:

More recently, a remarkable consensus has developed among central bankers that there’s a new “red line” for policy: A 2 percent rate of increase in some carefully designed consumer price index is acceptable, even desirable, and at the same time provides a limit.

I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

Bottom line, as the relatively new head of the New York Fed, Williams is using his powerful position to push for more inflation. And given President Trump's continuing pressure on Fed chairman Jay Powell to keep money easy, Williams inflationist policy perspective may be just the theoretical policy cover story Powell needs to allow price inflation to run "hot."

-RW