Williams Says the Fed's Rate Hike Guidance Isn't a Commitment

(Bloomberg) -- U.S. central bankers are feeling a little misunderstood..

Following days of steep stock market losses, the president of the Federal Reserve Bank of New York sought to reassure investors that officials will listen to market signals in setting interest rates, emphasizing that their outlook for further gradual hikes is not set in stone.

“This is not a commitment, or a promise, or in any way a sense that we know for sure that’s what we are going to do,” John Williams said Friday during a TV interview on CNBC. “We are actually saying pretty clearly this is how we see it now based on our positive, pretty optimistic view of the economy, and we will change that as needed.”

U.S. equities initially extended a morning rally on his comments before largely giving up their gains over renewed political turmoil around President Donald Trump’s White House.

Fed communication has been slammed this week for ignoring steep stock-market losses that could be a signal of underlying economic weakness, with President Donald Trump also escalating his criticism of the central bank. Williams is the first official to speak publicly since Chairman Jerome Powell’s press conference on Wednesday to explain why the Fed raised rates. The New York Fed chief sought to clarify the message by stressing policy flexibility, while maintaining that the economic outlook remains very upbeat.

“The really important message is the economy is strong. That’s why we are seeing strength going into the New Year. We expect a healthy economy in 2019. That is our baseline expectation,” Williams said in the interview. “However, we are listening very carefully to what’s happening in markets.”

Julia Coronado, president and founder of MacroPolicy Perspectives LLC in New York, said the overall message from Williams “isn’t that different from what Chairman Powell said Wednesday, though the emphasis on flexibility and risk was more pronounced.”

The Fed’s rate-setting committee, of which Williams is vice chairman, voted unanimously on Wednesday to raise rates for a ninth time in three years and published projections signaling it expects two hikes in 2019.

Williams endorsed the rate-hike projections published Wednesday, saying “something like two rate increases” next year “would make sense in the context of a really strong economy moving forward.” He also suggested the Fed didn’t yet need to rethink its balance-sheet unwind given the strong outlook, but stressed policy makers would be flexible as conditions change.

“We did not make a decision to change the balance-sheet normalization right now, but as I said, we’re going to go into the new year with eyes wide open,” Williams said. “I don’t see the need today to change our balance-sheet normalization.”

His overall message was reinforced later on Friday by Cleveland Fed chief Loretta Mester, who also voted for the rate hike. She told Wharton Business Radio on SiriusXM that officials think the economy’s underlying fundamentals are quite good, but they will weigh incoming information that contradicts that outlook.

“I certainly take a look at what’s going on in financial markets” and ask “are they trying to tell us something about fundamentals? And so that’s the question,” she said.

The benchmark S&P 500 Index of U.S. stocks has fallen about 17 percent from September’s record high, to the lowest in more than a year, amid rising interest rates and growing concerns over global growth.

Powell’s press conference Wednesday following the rate-hike announcement led to more risk aversion in financial markets, as he voiced confidence that the economy would likely remain strong enough in the year ahead to require additional rate increases.

“Maybe the Fed is not being proactive, but they are not entirely oblivious to what is going on,” said Priya Misra, head of global rates strategy at TD Securities. Williams “provided that little bit of a shoulder for the market to lean on, which I think Chair Powell sounded a little more blasé about.”

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