Williams on Board With A Pause, But Likely Still Expects to Tighten Later in the Year

It was apparent in Williams’ remarks this morning, which included a speech followed by a Q&A session, that he has adjusted his message to be in line with recent remarks from a range of other policymakers as well as the minutes. In particular, his remarks reinforced the message that there will be a pause in rate hikes in  March. They were full of dovish language, with great emphasis on caution and data dependency (“The approach we need is one of prudence, patience, and good judgment. The motto of ‘data dependence’ is more relevant than ever.”). He also reiterated the recent messaging on the balance sheet, stressing that, “if circumstances change, I will reassess our choices regarding monetary policy, including the path of balance sheet normalization. Data dependence applies to all that we do.” However, under that dovish messaging there still appears to be an economic optimist (but not a hawk, per se), much like the image Powell has projected in his public remarks. Williams is certainly on board with a pause in the near term, but he is likely reasonably confident that the data will confirm his basic economic outlook and warrant some further tightening later in the year. 

This is noteworthy because of its implications for where Powell and the center of the Committee are. Along with Powell and Clarida, Williams is a member of the FOMC’s so-called troika, whose members tend to have the greatest influence on monetary policy. Clarida has had dovish reservations for some time, and he showed escalated concern in his speech last week (our note on Clarida). Indeed, Clarida didn’t make much of a case for further rate hikes at all. In particular, he signaled increased concern about low inflation and meeting the  price stability part of the dual mandate, which marked a departure from the consensus: “Inflation has surprised  to the downside recently, and it is not yet clear that inflation has moved back to 2 percent on a sustainable  basis.” Clarida also suggested that the strong growth seen in 2018 might be sustainable. The question was whether Clarida’s remarks reflected a new, more-dovish center of the FOMC or just the fact that Clarida was more dovish, to begin with. Powell had not voiced these concerns raised by Clarida, but Powell, as the Chair,  would be more hesitant to do so even if he did hold these views.  

In his remarks today, Williams appeared not to share the more-dovish concerns of Clarida. This suggests that  Powell may be closer in his views to Williams than to Clarida and that Clarida remains to the dovish side of the center. Most important, Williams, like Powell, did not signal any change in how he assesses the prospects for meeting the price stability side of the dual mandate. Inflation has been below its objective “more often than not” in recent years, “but things are looking better. Underlying measures of inflation have been running just below 2 percent over the past 12 months, and I expect them to be right at 2 percent this year…So, from the  perspective of the Fed’s dual mandate as a whole, things are looking very good.” 

On the growth outlook, Williams also appeared to be more in line with Powell than Clarida. He described several ways in which circumstances are different now than at the beginning of 2018: There is less optimism about global growth, fiscal stimulus is fading, financial conditions are less accommodative, there is a partial government shutdown, and there are “elevated geopolitical uncertainties” abroad.1 He also acknowledged    

1 Williams suggested he sees a significant, but temporary, negative effect on real GDP growth from the shutdown: “It is  going to be a drag on consumer spending and the economy in the first quarter directly, enough to pull growth down by  

concerns about slowing growth specifically associated with recent market volatility: “Other ‘data’ confirm that the winds in our sails have calmed. The headlines have been about investors’ concerns around growth,  which have contributed to volatility in markets. This is also showing through in surveys of households and  businesses, who say that they are somewhat less confident about future economic prospects.” However,  Williams put these factors into the context of the narrative that growth has been expected to moderate, and that this shouldn’t necessarily be a concern: “A softer economic outlook doesn’t mean we should prepare for doom and gloom. On the contrary, we’ll likely see GDP growth somewhere between 2 and 2½ percent this year. That’s a step down from 2018, but still consistent with a healthy, growing economy.” What he wants to see is “solid” growth, a moderation from the “robust 3 percent” growth in 2018. 

Williams elaborated that, “If growth continues to come in well above sustainable levels, somewhat higher interest rates may well be called for at some point. However, if conditions turn out to be less robust, then I  will adjust my policy views accordingly.” This suggests that Williams’ base case is that further tightening will  be appropriate at some point. It also suggests that the 2-2.5 percent growth rate he expects for 2019 qualifies  as “well above sustainable levels.” So Williams apparently continues to see the rate of trend growth, which  he’s previously placed at 1¾%, as modest. This contrasts with Clarida, who last week said the FOMC will  assess “what monetary policy stance is warranted to sustain strong growth and our dual-mandate objectives”  (italics our emphasis) and raised the possibility that stronger labor supply and productivity growth in 2018  could be sustained, which “would need to be factored into the inflation outlook and thus the appropriate  settings for monetary policy.” 

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