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New York Federal Reserve Chairman John Williams on Thursday called on central banks to change their strategy to fight low inflation, which he called "a symptom of deeper problems affecting advanced economies."
"Prior to 2008, inflation was a major concern of the public and central banks," said the key district chief of the Fed during a speech to the New York Council of External Relations. "And while I'll always be alert to too high inflation, too little inflation is now a more urgent problem."
The comments come amid generalized speculation about the Fed's next move, but Williams has not touched on monetary policy in detail. He said that "low neutral rates" or the level that neither promotes nor limits growth "are very real, and they are here to stay".
The Fed considers that the level of inflation is good, but it has not always managed to achieve this goal throughout an economic recovery close to the longest ever recorded history. Markets have recently bet that the Fed would start cutting rates later this year, up to three times, in part because inflation has remained so low.
Williams attributed the problem to two factors: a longer life span and slower population gains that hamper productivity and thus keep the United States and other developed economies in a weak growth situation.
In the face of these likely factors, he called on the Fed and its global counterparts to change their approach to monetary policy.
"Persistently persistent inflation creates a vicious circle, where expectations of low inflation dampen current inflation.If inflation declines, central banks will have even less leeway in the face of the slowdown" said Mr. Williams. "Starting with monetary policy, central banks should re-evaluate their strategies, goals and the tools they use to reach them."
He suggested encouraging investment in a wide range and removing barriers to labor and economic participation.
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