john c williams : inflation targeting - securing the anchor remarks by mr john c williams, president and chief executive officer of the federal reserve bank of new york, at the bank of england research workshop on " the future of inflation targeting ", london, 9 january 2020. * * * as prepared for delivery introduction good afternoon, and happy new year. monetary policy frameworks are complex, technical, and rarely make it into the public consciousness. but they are of vital importance to economic prosperity. and as we stand on the brink of a new decade, it is critically important that we understand how the frameworks central banks choose influence economic outcomes, both today and in the future. when andy haldane invited me to be on the panel, he posed the provocative question : what will monetary policy frameworks look like 30 years from now? as a policymaker, i try to avoid making predictions for the future. but given that i will assuredly be an ex - central banker in the year 2050, i think i ’ m safe to have free rein! that said, i should still give the standard fed disclaimer that the views i express today are mine alone and do not necessarily reflect those of the federal open market committee ( fomc ) or others in the federal reserve system. in my remarks today, i ’ ll discuss how the monetary policy landscape has evolved, and what that means for inflation targeting in 2020, 2050, and beyond. the history of inflation targeting before i look forward, it ’ s worth looking back and highlighting that it ’ s now 30 years since the inception of inflation targeting. in 1989, the central bank of the small country of new zealand announced that the main objective of its monetary policy was to target the inflation rate. 1 in the subsequent decades, most central banks in major economies coalesced around this approach of aiming for a low, publicly announced inflation rate. for the past three decades, this approach has been remarkably successful at keeping inflation low and stable. 2 the inflation targets have acted as a nominal anchor for inflation expectations, which play a big role in determining actual inflation. for anyone who was trying to get a mortgage at a double - digit interest rate or seeing prices go up and up back in the days of high inflation, it ’ s almost unthinkable that in 2020 central banks are pondering the opposite challenge : how to prevent inflation from being too low. but it ’ s the reality most policymakers face, and the one our monetary

not unlike the measures of the output gap shown earlier. as illustrated, the wage gap is calculated as the difference between the rise in labour costs in manufacturing in norway and 4. 5 per cent. the wage gap is calculated as the difference between the rise in labour costs in norway and trading partners in the years prior to 2001. there tends to be a correlation between the wage gap and the output gap. the output gap can be an expression of our assessment of pressures in the economy. the wage gap can be a more direct indication of the social partners ’ perception of the situation. this provides useful information in interest rate setting. moreover, wage figures and wage growth estimates in real time are considerably more reliable than preliminary national accounts figures for output and demand that are used to estimate the output gap, which tend to be subject to substantial revision. the wage growth estimates drawn up by norges bank early last summer, just after the income settlements, underestimated the increase by 0. 16 percentage point, with small deviations, on average for the period 1995 - 2001. on the other hand, the wage gap is a lagging indicator. wage growth in any one year has been heavily influenced by economic developments in the preceding 12 - 18 months. when we look at future prospects, a good estimate for the output gap can therefore provide a better indication of the outlook for wage and price inflation. both these simple measures are based on stylised assumptions concerning productivity growth and must therefore be used with caution. wage gap1 ) and output gap per cent output gap wage gap - 1 - 1 - 2 - 2 1 ) up to 2000 : difference between rise in hourly labour costs in manufacturing in norway and among trading partners. thereafter growth in excess of 4. 5 per cent. - 3 - 4 - 3 - 4 sources : statistics norway, trcis / imf and norges bank sg gausdal 31. 01. 03 the high level of wage growth in 2002 implied a tight monetary policy. the interest rate differential against trading partners widened. the krone appreciated further. relationships in the foreign exchange market are unstable, but there are a number of fundamental forces that influence the krone. high oil prices and the phasing in of petroleum revenues into the norwegian economy are part of the explanation, but the predominant factor is probably the cyclical divergence between norway and abroad. krone exchange rate1 ) and 12 - month interest rate differential against trading partners. per cent 4. 0 3. 5 3.