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Fed's Williams: Optimal to have decision on best rate-setting framework before next recession

San Francisco Fed President John Williams laid out a case for price-level targeting in a paper that recently got published in the bank's latest Economic Letter.

Key headlines (via Reuters)

Using so-called price-level targeting, either alone or combined with another approach like a higher inflation target, would help stabilize inflation and keep unemployment low not only when interest rates are near zero but also even when they are higher.

Unlike some well-known monetary policy rules, it works even if policymakers have a very imperfect understanding of the levels of potential output or other structural changes affecting the economy.

I'm not advocating for an immediate switch, but rather serious discussion over the next couple years on the best way to set rates, given that rates are unlikely to rise as high as in past expansions.

If we don't do anything, when the next recession hits, central banks will find themselves back in the same problem we had in the last decade.


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