Federal Reserve Bank of San Francisco President John Williams said the U.S. should use financial regulation and supervision to prevent future crises instead of monetary policy tools such as the benchmark interest rate.
“Monetary policy is poorly suited for dealing with financial stability concerns, even as a last resort,” Williams said Thursday in the text of a speech for delivery in Singapore. He didn’t comment on his outlook for policy or the U.S. economy in the prepared remarks.
The U.S. should instead address stability risks using regulations that target individual firms but work toward achieving system-wide goals, said Williams, who votes on monetary policy this year.
Some U.S. policy makers have warned that keeping the main rate near zero since December 2008 to help boost hiring and growth could be promoting bubbles in asset prices. Others have said monetary policy is too blunt a tool to combat excess.
“Monetary policy actions offer unfavorable and costly trade-offs between macroeconomic and financial stability goals,” Williams said at a regulatory symposium co-hosted by the San Francisco Fed and Singapore’s central bank.
There are times when maintaining financial stability might conflict with the monetary policy needed to achieve the Fed’s goals, Williams said. If risks were rising in a weak economy, concern about financial stability may suggest raising rates higher than needed to keep unemployment low and inflation stable, he said.
Using monetary policy to pursue financial stability could undermine the credibility of the Fed’s commitment to its inflation target and unmoor inflation expectations, he said.
Williams also noted that it’s not clear monetary policy moves would play a “meaningful role” in alleviating risks to the financial system given its long lags and uncertainty.
“Based on the standard principle that highly uncertain policy actions should be used with caution, the ambiguous effects of monetary policy on financial stability are another argument for limiting use of this tool,” Williams said.
Williams, 52, has led the San Francisco Fed since 2011. His district includes Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah and Washington.