What banks – and fintechs – can expect from N.Y. Fed’s new chief
By John Heltman
The New York Fed has always played an outsized role within the Federal Reserve System, owing in part to its association with the nation’s financial center and as the home jurisdiction of many of the largest financial firms. It also plays a key functional role conducting the open market operations directed by the Federal Open Market Committee. Unique among regional banks, the New York is a permanent FOMC member. But Williams argued in this speech that using inflation as an indicator may be less effective, especially in uncertain times, than simply assessing the prices of things relative to a price target that implies a certain rate of inflation. “In a nutshell, the big advantage of this approach is that any surges or drops in the inflation rate need to be made up in the future,” Williams said. “This assures that, over the medium term, inflation stays on track, even if policymakers have a very imperfect understanding of the levels of natural rates or other structural changes affecting the economy.” Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that if Williams takes this idea to the FOMC and tries to sell it, he may find some willing buyers. The Fed’s inflation targets have been stubbornly hard to meet, she said, and if the FOMC members buy in to the idea of flexible price-level targeting, it could change monetary policy dramatically. “It’s really a very strong statement about what’s wrong with the way the Fed is working now,” Petrou said. “As president of the New York Fed … he could be really important in really forcing the Fed to rethink its monetary policy. And I hope he does.”