SF Fed’s Williams: The Challenges of Sustained Low Interest Rates Merit Reexamination of Monetary Policy Frameworks Worldwide

  • Says a very low neutral interest rate (r-star) environment is “not confined to the U.S. economy”
  • Emphasizes need for “a global perspective that recognizes the interdependence of our economies and financial systems”
  • Calls for policymakers to debate monetary policy framework options that “make ourselves more resilient”

San Francisco, California – Today, John C. Williams, president and CEO of the Federal Reserve Bank of San Francisco, told a gathering of policy makers and central bankers at the SF Fed’s 2017 Asia Economic Policy Conference that “economic realities for the world’s developed economies have fundamentally changed and dealing with the challenges of the future is going to be much harder than it was in the past.”

This new economic reality is driven by “a lower sustainable growth rate, reflecting slower productivity and labor force growth,” Williams said. Demographics and global demand for safe assets also have a role to play. Citing research that shows these challenges are not confined to the U.S. economy, he discussed how these conditions also have driven the average r-star across Canada, the euro area, Japan, and the United Kingdom to new lows.

Low r-star means that interest rates are likely to be only around 2.5 to 3 percent when the next recession hits. Williams emphasized that “We won’t be able to cut interest rates by the typical 5 percentage points to stimulate the economy because we’ll quickly hit the zero lower bound.”

Turning to solutions, Williams highlighted the need for a wider discussion of monetary policy approaches. The potential strategies to consider include the unconventional policy tools from the last recession, negative interest rates, a higher inflation target, and modifying inflation targeting by moving to a price-level or nominal income target. He noted that “these are the kinds of conversations we need to be having to put us in the best position possible to tackle the next recession.”

The Federal Reserve Bank of San Francisco (SF Fed) works to advance the nation’s monetary, financial, and payment systems to build a stronger economy for all Americans. As part of the U.S. central bank, the SF Fed serves the Twelfth Federal Reserve District, which covers the nine western states—Alaska, Arizona, California, Hawai’i, Idaho, Nevada, Oregon, Utah, and Washington—plus American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. By pursuing our two key goals of maximum employment and price stability—known as the Fed’s dual mandate—we work toward supporting an economy that works for everyone.