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Williams Weighs In

The New York Federal Reserve bank this week hired John Williams to be its president and chief executive officer, a position he held with the San Francisco Federal Reserve Bank. If you're wondering about his views, Williams spoke last fall at the Federal Reserve-CSBS research conference on community banking.

The topic: setting a "new normal" for interest rates. To Williams, the "new normal" reflects lower rates of labor market participation, productivity growth, sustainable economic growth, and inflation. 

Key excerpts from his remarks:

The Fed is moving towards a more normal monetary policy, and that means rising interest rates. But...a new normal [is] where interest rates are lower than the heady days of the 1990s and early 2000s.

The new normal is likely to be 2.5 percent, and banks, and everyone else, need to prepare accordingly. 

The sustainable growth rate of the economy has slowed dramatically from prior decades.  I put that growth rate at 1.5 percent for inflation-adjusted GDP, the slowest pace we have seen in our lifetimes. 

What's caused the decline in labor force growth? Two main things: First, the Baby Boomers are retiring in droves. Second, the fertility rate in the United States has been declining and recently reached an unusually low level. Monetary policy can only go so far, and it's beyond my job description to encourage people to have more babies! 

The same thing is true about productivity growth, which also has slowed in contrast with earlier decades. In the 1990s and early 2000s, annual productivity gains averaged 2 to 3 percent. Productivity gains since the recession have generally hovered below 1 percent. 

Stepping back, the broader implication is that conventional monetary policy has less room to stimulate the economy during an economic downtown. Looking through this lens, we will need to lean more heavily on unconventional tools, like central bank balance sheets, keeping interest rates very low for a long time, and potentially even negative policy rates.

You can read Williams' full remarks here.  

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