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Fed’s Williams Tells Policy Makers To Brace For A Lower-Interest-Rate World

A top policymaker of the Federal Reserve on Tuesday said that low inflation and slow recovery from recession will continue unless policymakers do something to stabilize the economy of the world at the time of low rates of interest.  The Federal Reserve President of New York John Williams said in a conference of policymakers in Switzerland that experience tells us that we should prepare for our future than to wait for long. He added that failure to get ready for future often is equivalent to preparing for the future. Low birth rates are keeping the population growth at low rates in the wealthier economies of the world and the advancements in technology have shifted to normal levels, he said. Williams also added that each trend caps the growth of economies.

Low growth results in less investment and elderly population in advanced economies raises the saving. Low demand and high supply of savings reduces the interest rates’ neutral levels around the world which would not actually restrict the economy. Williams said that these factors are keeping the rates near zero where the rates tend to lose their strength to respond to recession. He added that they are not seeing that neutral rates would go back to the normal levels in the absence of change in technological or scientific breakthrough and demographics.

The Federal Reserve has set the interest rates in US from 2.25 to 2.50%.However the rates are lower and also negative in regions like Europe and Japan. Williams used to be a researcher at the Federal Reserve in Switzerland and is known for developing estimates of neutral rates. He is encouraging the Federal Reserve to respond to lukewarm inflation by trying to keep the interest rates in US low for longer. However any other replacements to current approach of the Federal Reserve could prove to be controversial which can raise questions as to whether the Federal Reserve could live up to complex commitments for meeting the target of 2% inflation that it has often missed.