Fed’s Williams Would Welcome a Further Decline in Unemployment

(Bloomberg) -- Federal Reserve Bank of New York President John Williams said monetary policy is in “the right place,” and expressed little worry over inflation even if unemployment falls further.

“We haven’t seen inflationary pressures really emerge even with very low unemployment,” Williams said Wednesday in an interview on CNBC television. “If the unemployment rate moved down somewhat, I actually think that would be very good in terms of a strong labor market, probably help move inflation back up.”

Inflation in the U.S., as measured by the Fed’s preferred gauge, has undershot the central bank’s 2% target for most of the past seven years, even as unemployment has declined to a half-century low of 3.5%.

Fed officials signaled this month that interest rates will likely remain on hold for an extended period after they cut their benchmark rate three times in the second half of 2019 in the face of growing risks to the economy. Several policy makers have said they won’t support adjusting rates again until they see a “material” change in their outlook for moderate growth, low unemployment and low inflation.

Williams repeated that line and characterized the economy in upbeat terms. He’s forecasting growth in 2020 of around 2%, expects unemployment to remain near the current level and believes inflation will move closer to the Fed’s 2% objective.

“I feel very good about where the economy’s been this year and feel good about how it’s going to look next year, very close to our maximum employment and price stability goals,” he said. “My outlook is very positive.”

Risks Remain

Still, he continued to see peril in the slow pace of global growth and on the international geopolitical front, despite positive trade developments.

“There’s still some significant risks to the downside,” he said. “Some of this uncertainty is going to likely be with us for the time being.”

Asked whether the Fed is aiming to push inflation above its target to make up for past undershoots, Williams referred to the Fed’s policy of pursuing 2% inflation in a “symmetrical” way, meaning it can tolerate equally some misses to the upside and to the downside.

He also suggested a subtle shift when he added this meant hitting 2% “on average.”

“I really see this notion that we’re on average around 2% inflation, sometimes a little bit above, sometimes below, and that’s what I think the word symmetric means,” he said.

The Fed’s annual Statement on Longer-Run Goals and Monetary Policy Strategy, a document that’s voted on each year and articulates the Fed’s approach to hitting the goals set by Congress, has never expressed the inflation target as something policy makers aim to hit on average. Instead it has directed officials to ignore the past performance of inflation and seek to move inflation closer to the target at all times.

Williams addressed worries about year-end liquidity in overnight funding markets by saying the Fed’s actions to date have been “highly effective.”

“We are in a very good position in terms of providing liquidity, providing reserves to the system and importantly keeping the federal funds rate” inside its target range, he said.

To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Vince Golle

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