The U.S. Federal Reserve's new inflation target is an example of the kind of steps policymakers globally should take to bolster cross-border coordination and stabilize the economy, an influential Fed official said on Tuesday.
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William Dudley, president of the New York Federal Reserve Bank, did not address U.S. monetary policy beyond saying that the 2 percent inflation target, announced in January, shows the Fed will only take action such as purchasing bonds as long as it is consistent with its policy goals.
Still, macroeconomic policies are often too narrow in their focus and can ignore effects beyond national borders, such as on the trade balances of foreign countries, Dudley said in remarks prepared for delivery to a Swiss National Bank-International Monetary Fund conference in Zurich.
He pointed to the inflation target as a positive step toward transparency that can help policymakers outside the United States anticipate the economic and financial fallout in such an interconnected world.
"In doing so, the Fed is also continuing to underscore that actions such as our purchase of U.S. government securities are driven exclusively by our monetary policy goals, and that these policy actions will not continue beyond the moment they become inconsistent with our dual mandate objectives," Dudley said.
"In general, policymakers should strive to ensure that we have both fiscal and monetary policy frameworks that are transparent and viewed as credible and durable."
Dudley is a close ally of Fed Chairman Ben Bernanke and, as head of the Fed's New York regional bank, has a permanent vote on policy actions. He said better cross-border coordination, in general, is warranted.
"(T)he issue for policymakers is whether the policies we put in place will allow adjustments to occur in a way that is consistent with a stable global economy, high levels of employment, and low inflation," Dudley said.
"In macroeconomic terms, the prospects for achieving a more cooperative solution can be enhanced by policy transparency so that the policy goals and reaction function of each authority can be well understood by others."
As steward of the world's largest economy, the Fed's policy actions typically have larger impacts relative to the actions of other central banks.
The Fed's ultra-low interest rates since late 2008 have kept pressure on the U.S. dollar, the world's reserve currency, often hurting non-U.S. exporters. The Fed expects to keep rates "exceptionally low" through late 2014.
In another effort to battle the recession, the Fed's purchases of some $2.3 trillion in long-term securities in the last few years have helped keep U.S. Treasury yields low.
The Group of 20, for instance, has long discussed better coordination in dealing with global trade imbalances. However, national central banks still largely conduct policy independently.