MNI: Williams Defends Fed's Unconventional Policy Tools

Federal Reserve Bank of New York President John Williams on Friday said central banks must have the appropriate tools to carry out their mandates and that includes so-called unconventional policies, beyond just the setting of the short-term interest rate. 

"It is not enough to be accountable and independent: central banks must have the appropriate tools to carry out their mandates," Williams said in prepared remarks for a speech at the Dutch National Bank in Amsterdam. 

Treasury Secretary Scott Bessent has criticized the American central bank's operating model as a "gain-of-function monetary policy experiment," with the overuse of nonstandard policies, mission creep and institutional bloat that threatens the central bank’s independence.

Williams, the current vice chair of the FOMC, talked about the importance of three key principles, including the ownership of price stability and independence of action, transparency about goals and strategy, and a focus on anchored inflation expectations.

The academic literature, including the Taylor Rule and its variants, has reinforced that monetary policy is restricted to the setting of official rates, he said. "Indeed, there even has been a label attached to it: 'conventional monetary policy.' By implication, other monetary policy actions that have been used—such as forward guidance and balance sheet policies -- are deemed 'unconventional,' and therefore somewhat suspect." 

"This narrow understanding of monetary policy is alien to the history of monetary economics and central bank practice," Williams said, pointing to detailed histories of the Fed by Milton Friedman and Anna Schwartz, and Alan Meltzer. 

Those accounts dispel "the notion that monetary policy is limited to setting the short-term rate and instead emphasizes broader measures of liquidity and longer-term interest rates." 

"Of course, how and when to use policies depends on the circumstances and the risks policymakers are facing. But this is a matter of tactics and implementation, not of principle or strategy," Williams said.