Fed’s Williams defends current monetary policy framework

Investing.com -- New York Federal Reserve President John Williams said Tuesday that the central bank's system for managing monetary policy has worked well, while noting the framework can be modified as financial markets change.

The current approach of supplying ample reserves to the financial system has proven effective at controlling interest rates and supporting the smooth operation of core financial markets, Williams said in prepared remarks for a conference on the Treasury market at the New York Fed.

Williams did not discuss the outlook for monetary policy or interest rates in his remarks and was not scheduled to take questions after his speech.

The New York Fed chief said the central bank's rate-control framework is not permanent and can be adapted to changing market conditions.

"As markets evolve over time, we must ensure that policy tools are fit for purpose to carry out their necessary functions," Williams said. "Put simply, the evolution of financial market structure leads to the evolution of how we carry out monetary policy effectively."

Williams spoke as the central bank reviews various aspects of its operations under Fed Chairman Kevin Warsh, who took over in May. The Fed has established task forces to examine how it communicates, evaluates data and manages its balance sheet. Warsh previously criticized the central bank for its large asset holdings and system of providing substantial liquidity to the financial system through reserves.

Before the 2008 financial crisis, the Fed maintained tight liquidity in financial markets, but that approach was later abandoned.

"There should be little or no opportunity cost to holding reserves at the central bank," Williams said. "A high opportunity cost is simply inefficient and creates other distortions that interfere with market functioning and stability."

Williams said the Fed's strategy will respond to market conditions. If demand for reserves changes due to regulation, market structure or other factors, the Federal Reserve will adjust the supply of reserves over time, he said.

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