NEW YORK (Reuters) - Policymakers need to add stimulus early to deal with too-low inflation when rates are near zero and cannot wait for economic disaster to unfold, a Federal Reserve policymaker said on Thursday.
In what will likely be read as a strong argument in favor of quick action by the Fed to cut rates this month, New York Fed President John Williams (NYSE:WMB) said that one of the lessons from his research is that, when rates and inflation are low, policymakers cannot afford to keep their "powder dry" and wait for potential economic problems to materialize.
"It's better to take preventative measures than to wait for disaster to unfold," Williams said in remarks prepared for delivery at a central banking conference here. "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress."
In recent weeks, Fed policymakers have identified a host of concerns they think could end what is now the longest U.S. economic expansion on record. Chief among those concerns include a U.S.-China trade war denting business confidence, a global manufacturing slowdown and inflation below the Fed's target of 2% a year.
Williams sounded particularly concerned about inflation, with the Fed's preferred measure of prices gaining 1.6% a year now.
"People may start to expect it to stay that way, creating a feedback loop, pushing inflation further down over the longer term," Williams said. "The lower average level of inflation translates into a lower level of interest rates cuts available during a downturn, making it even harder for policymakers to achieve their goals."
Taking quick action to cut rates in the face of "adverse economic conditions" and keeping rates lower for longer, Williams said, "should vaccinate the economy and protect it from the more insidious disease of too low inflation."
Other Fed policymakers have made a different case. Kansas City Fed President Esther George, for instance, on Wednesday suggested she might be willing to support a cut but only if looming economic risks materialize. [nL2N24I10K]