Fed's Williams Says Outlook Still Solid While Risks Mounting

(Bloomberg) -- Federal Reserve Bank of New York President John Williams said the outlook for the U.S. economy remains solid while acknowledging that risks are rising and that investors expect the central bank to lower interest rates in response.

“My baseline is a very good one but at the same time we obviously, as always, need to be prepared to adjust our views,” said Williams, answering questions from a moderator and the audience following a speech in New York on Thursday.

Williams -- who’s influential on monetary policy given the New York Fed chief holds a permanent vote on the Federal Open Market Committee -- said he understands the market’s concerns. He stopped short of endorsing an interest-rate cut as he reinforced the openness and flexibility that Fed Chair Jerome Powell and Vice Chair Richard Clarida signaled in remarks earlier this week.

He said the inverted yield curve -- in which long-term Treasury rates have fallen below short-term rates -- gives a “pretty strong signal” that markets expect borrowing costs to come down, and he takes that seriously. At the same time, Williams said he doesn’t see the indicator as the single “oracle” that a recession is coming, even though such inversion has preceded previous downturns. He added that the yield curve didn’t require the Fed to cut rates.

Fed officials have signaled they’re open to cutting rates if an escalating trade war dims the U.S. economic outlook, but they’ve stopped short of flagging a move when they next meet June 18-19 in Washington.

Powell said Tuesday he was closely monitoring the implications of trade developments and the central bank would “act as appropriate” to sustain the economic expansion.

Investors have increased bets the Fed will ease after President Donald Trump threatened Mexico last week with additional tariffs unless it curbs the flow of migrants into the U.S.

Dallas Fed chief Robert Kaplan told reporters in Boston earlier on Thursday that it was premature to decide that the central bank needs to respond.

“I think risks to the downside have increased but I think it’s too soon to make a judgment about whether any actions would be appropriate,” he said. “I want to give this a little more time and let” events unfold.

--With assistance from Christopher Condon.

To contact the reporter on this story: Matthew Boesler in New York at mboesler1@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Alister Bull

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