Fed's Williams on Economy, Inflation, Europe, Trade



John Williams President of the Federal Reserve Bank of New York John I still have to remind myself that yes it's just almost a year not San Francisco but New York now what a year it's been and of course this year punctuated hit hard by this escalation of the trade war you know first the u.s. broadening the terrorist boosting the terrorists China retaliates when you look at the economy what do you see a potential economic shock or just sort of a manageable bump in the road well I would just start from where we are today and that is the economy is in a very good place we've seen solid economic growth really good job gains very low unemployment and inflation a little bit below our target and I think in a pretty good place so we're starting I think in the big macro picture and in a good place and I think we got monetary policy in a good place what we need to do in the Fed and looking ahead of whatever happens whether it's effects of trade issues or others is really just keep our focus on achieving our goals which is maximum employment and price stability again I think we're close to those goals now and adjusting our policy stance for whatever happens so that we can best achieve those goals well John let's look at first quarter growth since you said the economy is in a good place it's not that it's in a bad place but when you look at that three point two percent headline print on GDP it looks great but when you look inside the report you see a lot of that was inventory building and when you look at business investment which flattened out when you look at consumption which slowed pretty sharply in the first quarter so that final sales were up just over one percent you got a very different picture and it seems to me a picture where I have to ask you is this economy vulnerable to a trade war impact at this point so first of all I agree with you you don't want to overreact to one data point or two data points up or down and so when I look at that first quarter data you're right that there are a mixed messages there what we've seen since that first quarter GDP terms of retail sales consumer spending and other economic indicators and importantly employment growth is that the economy has rebounded pre-stored solidly after a bit of a soft patch late last year earlier this year so reading through that data again I saw definitely a weakness in the economy late last year earlier this year but a nice science of a nice rebound again I think the economy is well-positioned to deal with you know whatever events can happen in the future where would you look for signs of weakness where's your you've got to be watching this closely everybody the feds gotta begin we waiting to see what happens to the in the politics but more importantly where will you look to see worrisome signs in the economy this trade war is taking a bite well you know one area that we're obviously been focused on for quite some time is business confidence consumer confidence again those are areas that we saw can't turn down late last year and now have rebounded so looking at confidence looking at investment and consumer spending I mean if consumers lack confidence or worried or businesses or nervous about what's happening around either in the car country around the world they're more likely to pull back on their investment in their plans right now the data I think of again is kind of for solid growth but those are areas would be watching for signs of weakness sure because what happened a couple of months ago is not where we are now what we're trying to figure out is where we go and in this sense a very important point a lot of people have made is it may not even be just the you know slice and dice the numbers what's the economic impact what's the what's the bite that's taken from a trade war it's the financial market it's the volatility it's the uncertainty there that that's the threat to growth what do you see on that front sure and let me just start with that first point in terms of the you know what the effects of the tariffs are in terms of growth and inflation we've already seen some effects I think a little boost to inflation some subtractions maybe in growth but those are relatively small so far now as these tariffs get larger assuming that happens I think the effects will be bigger both boosting inflation and in the next year and probably having some negative effects on growth but I do agree that the real issue is about confidence about uncertainty when I talk to business leaders around the country what I hear or you know when you're uncertain about what's going to happen with policy or both the economy you pull back you hunker down and you wait to see what happens before you make those investments or hiring decisions so that's where I'm more focused on is really buying confidence and uncertainty we've had a pretty big drop on the stock market that doesn't only hurt confidence it tightens financial conditions something that Fed is watching very closely when we saw the transition on Fed policy from December into January into March we see that that seems to have been one of the things that was clearly on the radar screen a big pullback in stocks and what it could do to financial conditions and what that could do to the economy what do you see now cuz we it hasn't been too pretty last few days well one thing I would separate is between volatility and markets and markets move up and down that's that's what happens but more focus as you said on on the broader and more persistent movements and financial conditions because you're right if the financial conditions tightening that affects households willing to suspend businesses willing to invest and so that is something that is one of the factors that we take into account in thinking about where the economy is likely to go but the big picture there's a lot of things that affect the US growth and the fundamentals are still pretty solid job gains have been good real wages have been growing so I think a lot of the underlying kind of momentum in the economy is is still solid so sure watch financial conditions it's an important input into thinking about growth but not the determining factor John Williams president York Fed I just want to again thank you for joining me here in Zurich we've never met in Zurich before and I also want to thank our radio audience who's joined us in this very important Bloomberg Television discussion as well when you look at the landscape the Fed has not been including a balance of risk statements so much but let's say I asked I will John Williams today where does this leave us in terms of a balance of risks trade wars started we don't know the impact we know that there was some some vulnerable parts I mean again weak weaker consumption not good business investment in the first quarter do the risk tilt to the downside now so let me step back a little bit to last December and and and thinking about that balance of risk clearly what we saw late last year earlier this year was slowing global growth and clearly financial conditions tightening and those are the two areas of risk that I've been particularly focused on what we've seen on the international front is China's data China's growth has come in better in part because of the policy actions of the authorities have taken their Europe is still a mixed picture and we've seen some weakness in Japan and Korea so on on the global growth side I think there are some downside risks there financial conditions have overall improved quite a bit in the last few months so I would say overall the balance of risks is is roughly where it's been last you know as this change for a little bit bit still kind of roughly where it's been I think one thing we don't want to lose track of it is the US economy is still steaming ahead through this or the data the US data has been better than expected so you know everybody talks about the downside risks as we should and focus on that but of course we've actually seen some pretty strong numbers in employment unemployment that tell tell me at least the economy still got good momentum look at the markets look at the bond market rally yields continue to fall on the benchmark ten-year does that send a strong signal look at the fact that the yield curve from threes to tens briefly inverted again and is still very flat look at the fact that the Fed Funds futures market is once again pricing in at least one rate hike in 2019 are the markets reading the feds reaction function accurately well it's always hard to know you know whether they're what they're thinking about market participants were thinking about clearly this issue of downside risks is very much an investor's minds and that's understandable given some of the factors we just talked about you know my my point of view is always look at the medium term where's the economy going in terms of our employment in terms of inflation and just try to keep monetary policy in a nice balanced place to keep a nice balance in terms of our goals so I'm not gonna opine whether the markets are right or wrong because it will we'll have to wait and see how the data come through and and how these risks materialize or don't and and you know we're in the de fat aware that mantra of data dependency what that means is continuously reassess what are the data are telling us about the economy the outlook for the economy and really focus on this medium-term view of you know how do we best achieve our goals that has certainly said that the next move could be in either direction you'll do what's appropriate so let me just go a little bit further on this when does the damage from a trade war if it continues people are not looking for anything to end quickly and once you know there starts to be some deal made the tariffs may stay in place so when would it become severe enough that what were the cues tell you cheap it is time to start looking at a possible rate cut so first of all you know I do think of the terraces in a way is is like a simple apply negative supply shock and so it has various effects in the economy one is it affects inflation it probably will boost inflation by a few tenths over the next year it affects demand and in growth a bit in the short run but it also has negative effects on the on the kind of the value chains and how our our economic system works so I think what in thinking about that question we just have to keep assessing evaluating what are we learning from the data in terms of those effects but also the broader set of developments that we're seeing so I don't think there's any threshold or any specific point it's really just assessing where we are in inflation in terms of our goal because we need to get inflation back to 2% and keep it there on a sustained basis at the same time of making sure that we can sustain this economic expansion as long as possible so we just have to just assess and evaluate inflation is the other side of the tariff equation to be sure last year the economy was somewhat shielded by the tariffs because they weren't so much on consumer goods because China's currency declined that helped offset the impact on u.s. importers how big of a boost in inflation again back-of-the-envelope we can't be sure how much could this boost US inflation this year so it's hard to know so I'll start with that I'll end with that but I think based on you know the research this happened the studies have been very detailed looking at this you know we could probably get a couple tenths or two-tenths on the inflation rate over the next year based on what's already been announced if there are further escalation in terms of tariffs those effects would get even larger and you're making it exactly the right point that this is you know starts affecting consumer prices as these tariffs are applied more broadly and the consumers start seeing it in terms of the prices they're paying at stores so that's definitely a significant effect but something that you know obviously will be part of our analysis and and watching how the economy is doing with this be relief to the Fed after persistent inflation shortfall or is that the kind of thing that could start inclining the Fed on the other side of that rate path towards a rate hike this year because some people are starting to Pyne that gee if it boosts inflation enough that maybe the Fed would feel that it's more appropriate to start thinking about taking that step again it all depends on all the factors are happening and assessing the outlook for the economy typically in the past I would say a change and the value of the dollar or I think of the tariffs in a similar similar way affects inflation only for you know a year or so I don't see it as a factor affecting an underlying inflation over a longer period or inflation expectations so I think it you know you can look through that a bit you don't want to over react to those movements at the same time you know clearly a big movement inflation if it were to occur would be something that we would be studying carefully and and trying to make sure we understand how do we keep inflation right around or 2% symmetric 2% equal you know Jonathan conference you attended here in Zurich today which is an International Monetary Fund Swiss National Bank conference your panel was broadcast live on the website and in your prepared remarks you emphasized that in a world of lower growth do a lot to the supply-side factors like productivity in an aging population a world where you're so close to the zero lower bound it's very important for central bank's to reassess their toolkits etc it seems does this also show how important it is which way the Fed airs does the Fed air then in a world like that on oh maybe inflation is heating up we should be looking at rate hikes or does the Fed say gee we really can't afford another move towards zero lower bound and if anything our vigilance has to be in avoiding any kind of downturn in the economy particularly at a time when a trade war may hit it hard or at least hit it some and make it more vulnerable well I do think that the risk management aspects that you're highlighting or really important all at all times for monetary policy but especially when interest rates are near there's a lower bound that you were talking about that was definitely a concern and a consideration as we kept interest rates low for seven years and took our time bringing interest rates back more to to more normal levels this idea that you you have to manage those risks is what happens if something negative happens in pulls the economy back down now that we're kind of more in a normal economy I think in ever with good momentum those concerns are still my mind to think about that but really I think right in the current situation the focus has got to be on keeping the expansion going and also keeping inflation you're getting inflation right on our two percent goal so I so these lower bound issues are important they're definitely in my mind and thinking about this risk management but right now I think you know we're in a pretty good place we're well away from the lower bound and I think our policy choices are again we're a good balance pit place for that in your work and your economic research you've focused a lot on the role of inflation expectations and how important it is not to let them get anchored at too low of a level so I want to ask you this has the Fed had some role in in depressing inflation expectations the Fed started raising rates long before inflation when is anywhere in this cycle long before inflation was anywhere near the two percent target it kept raising rates gradual rate hike paths as inflation still was far from the target maybe getting closer but do you think with hindsight maybe the Fed could have handled that differently is that part of the reason why inflation far from being at or above target as some say it should be for a while is below and falling well obviously the experience in the last several years has caused many of us including myself to reassess that the inflation process and the factors that drive that one thing that we've done at the New York Fed and in the Federal Reserve System is really really examined you know how low we can get unemployment without creating inflation and my personally and I think others have lower their estimates of the natural rate of unemployment or how low unemployment can go before it ignites inflation so that's a good thing I mean that allows us to to be content with an unemployment rate that's much lower than we used to think was sustainable in the long run so definitely reassessing kind of your assumptions your models everything is an important part of that I do think there's a broader issue and I want to go back to his framework review that I think you know we can do our very best to get inflation at around 2% keep it in a in that around 2% I do think these challenges of a very low neutral rate of interest the lower bound tell us that all of us as central bankers including the Fed need to think very hard about how do we best frame our policy strategy how do we communicate that strategy and have we execute that strategy given that this lower bound issue is going to be a recurring aspect of our policy kind of policy reality in the future this is something we are doing the Fed and vice chair Clara de is leading that effort something I think is very important for us over the next year to really think about let's make sure we got our service of our strategy right would that we communicate that effectively so that we can you know do the very best we can in the future when you look at what's been happening with inflation though recently when you look at the fact that there is a trade war on the table have you seen anything and I get I want to put those two because those are two big reasons for people to say hey me maybe the next move is a cut is if you've seen anything with it would at least change your dot for this year I don't even know what your dot is you can certainly tell us now if you'd like but I just wonder is there anything at all that makes you at this point so I know you're assessing I know in your right place I know the economy is in a good place but is there anything at all that shifting you towards that action again I would say that some of the risks that I was worried about before about maybe the economy slowing faster than than we were expecting that that has diminished because the economy seems to have momentum the events in China so you have given me a little bit of comfort that they're they're not going through a hard landing the lower inflation data obviously is on the other side of that and some of these other concerns around trade and other factors I think you know there's a lot of risks out there fundamentally I think the policy is right in the right place I don't see any reason to have a bias upward or downward in the current circumstances but we're gonna evaluate reassess and see you know what's the best decision to get us to our goals well John Williams thank you so much for joining us here in Zurich John Williams president of the Federal Reserve Bank of New York




Comments
  1. I remember 2007, the US Housing Bubble and 1989 Savings and Loan Crisis. The talking heads then said, "WE'RE IN GOOD SHAPE, relative negativity". They do not know anymore now then they did then. The market drop in 1929, raised tariffs in 1930. The Smoot-Hawley Tariff Act passed in 1930 protect US industries. The 'Great Depression" 1929 to 1939. Then WWII and great spending brought us out of the depression. How about great spending on the 'GREEN NEW DEAL IDEA', create policies to save Americans and the Earth?

  2. America needs economic growth for it's workers, employees,employers, of a monetary award after 175 months on the job, regardless of how many employers, of $500.000 in a lump sum from Uncle Sam. This will include vocational school, high school, College, and military service. The printing and issuance of money is validated by any legitimate labor and production, for payroll purposes. Once a structure or business is completed and operating, Uncle Sam has been payed back. Taxpayers money is used for specific things. Contact your U.S. Congressman or Senator for an exceptional bill for an introduction to Congress.

  3. Why are we listening to this guy! Obviously he's going to speak favorable language about the economy. He's the problem. He works inside one of the banks that have been perpetuating the problem!

  4. Israel could attack with drones Saudis oil facility's and accuse Yemen or Iran did this .Oil prices go to roof sooner then later.

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