Federal Reserve Bank of New York President John Williams gave an optimistic review of the US economy, reiterated his support for further gradual interest-rate increases and expressed no concern that market participants have dialed back expectations for policy tightening in 2019.
Markets moved sharply after Chairman Jerome Powell said that the Fed is getting closer to its range of estimates for the neutral interest rate — the dividing line between tight and easy policy — and his phrasing was widely interpreted as a dovish signal.
Interest-rate futures pricing adjusted so that they’re now anticipating just one rate increase in 2019 following a hike at their meeting later this month. That’s at odds with the Fed’s Summary of Economic Projections from September, which suggests that officials see a rate increase this month and three more hikes next year. That forecast will be updated when officials gather December 18-19 in Washington.
“My own view is — I think completely consistent with what Chairman Powell said — is that the US economy is strong, but there are definitely” some “risks on the horizon,” Williams said in a press briefing. The Fed is in a good position to react to whatever the economy does going forward, he said.
“There’s a good — like 50 percent chance — that the economy performs faster, inflation picks up a little bit more than we expect, and I think we’re positioned to adjust to that,” Williams said. “We’re well-positioned to adjust our path of interest rates if the
economic data disappoint.”
Despite that nod to uncertainty, Williams painted an overwhelmingly positive picture of a strong economy that’s achieving the Fed’s goal of full employment. He said he expects tailwinds from fiscal stimulus to persist into 2019, and he thinks inflation will move slightly — but not not dramatically — above the Fed’s 2 percent target.
“I expect with the economy continuing to grow nicely above-trend, we’ll see further job gains, further declines in the unemployment rate, and unemployment will edge slightly below 3.5 percent over the next year or so,” he said. “I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion and sustained achievement of our dual mandate goals.”