Central banks should have independence to deliver on price stability: John C Williams

Central banks ought to own up for delivering on price stability and must be given the independence to act for achieving it, a top official from the Federal Reserve Bank of New York said on Friday. In a talk at the Reserve Bank of India (RBI) headquarters, the Federal Reserve Bank of New York President and Chief Executive John C Williams -- who is also a member of the rate-setting panel of the US' Federal Reserve -- said uncertainty will continue to be the defining characteristic of monetary policy for the foreseeable future.

"Central banks must own the responsibility to deliver price stability and have independence to act to achieve it," he said, while delivering the fourth Suresh Tendulkar Memorial Lecture.

History has taught us that central banks can be more successful at delivering sustainably low inflation rates when they are accountable and independent, he added.

He said in the 1970s, many central bankers believed monetary policy could only play a minor role in reducing inflation, while some also thought lowering inflation was completely outside of their control. This led to persistent high inflation rates and economic stagnation, Williams added.

"Today, regardless of economic shocks, changes in fiscal policy, or globalisation and deglobalisation swings, central banks recognise that attaining and maintaining price stability is their job to do," he said.

Transparency on communicating a central bank's strategy, policy decisions, and an explicit numerical longer-run inflation target has helped the central banks, he said.

"Central banks help anchor expectations by owning the responsibility to deliver price stability, publicly committing to an explicit inflation target, and taking the actions needed to ensure price stability," he said.

Williams said if a central bank has credibility in achieving price stability, longer-term expectations should remain consistent with its inflation target, and the deviation of short- and medium-run expectations from levels consistent with the target should be "temporary".

He also said the key tenets of inflation targeting -- ownership of price stability and independence of action, transparency about goals and strategy, and a focus on anchored inflation expectations -- have served us well in managing the extreme shocks and uncertainty of the past four and a half years.

The uncertainty in policy making will come from issues like artificial intelligence, climate change, deglobalisation, and innovations in the financial system, he added.