President John Williams of the Federal Reserve Bank of New York, who is a permanent member of the Fed’s policymaking Federal Open Market Committee, indicated in an appearance before The Economics Club of New York on Wednesday that the Fed is more likely to keep rates unchanged rather than to hike or lower them this year.
He expects U.S. growth will “slow considerably” from just above 3% last year to around 2% this year due to a “downturn in global growth,” especially in Europe; “heightened geopolitical uncertainty,” including Brexit and U.S.-China trade conflicts; and “the effects of tighter financial conditions late last year,” which slowed the housing market, but are abating currently.
Williams also expects U.S. inflation will continue to stay near the Fed’s 2% target. The challenge now is not that inflation will get too high but too low. That’s been a problem in other countries like Japan year after year, and the Fed wants to ensure the same does not happen in the U.S., Williams said.
“The overall picture of the [U.S.] economy is as good as its gets: very low unemployment sustainable growth and inflation just about at our 2% goal,” said Williams, in his speech. “The current federal funds rate of 2.4% puts us right at neutral.”
He added that “slower growth isn’t necessarily cause for alarm … It’s the ‘new normal’ we should expect.”
Williams told reporters afterward that U.S. “monetary policy right is where it should be and there is no no need to move in one direction or another” and that the Fed would not likely lower rates from here unless there were a “more of a sustained” decline in inflation.
Given the uncertainties that “continue to loom large,” including geopolitical risks, Williams stressed in his speech that it’s important that Fed policy remain “data dependent” and flexible in order to respond to changing circumstances.
He wouldn’t say when the Fed might end its policy of unwinding its balance sheet, which now stands at around $4 trillion in assets, down from a high of $4.5 trillion reached during its quantitative easing undertaking, but noted that “the balance sheet is not going to get anywhere near where it was” before the financial crisis, which was closer to $1 billion, because the world has changed. For the time being, the Fed will continue to shrink the balance sheet in a “predictable, telegraphed” manner, according to Williams.
As the Fed continues to monitor economic developments in the U.S. and internationally, it is also undertaking a “deep assessment and review of its monetary policy framework for long-term strategy and goals,” led by Vice Chair Richard Clarida, Williams said.
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