John Williams Downplays Recession Fears, Stresses Flexible Fed Policy

(Bloomberg) -- U.S. central bankers said the economy is still on track for solid growth this year despite concerns in financial markets that it was heading for trouble.

Federal Reserve Bank of New York President John Williams, one of the U.S. central bank’s top policy makers, downplayed fears of recession risks being signaled by bond markets. James Bullard, president of the St. Louis Fed, later said he expected second-quarter growth to rebound after a sluggish start to the year, and that calls for a rate cut were “premature.”

For Williams -- vice chairman of the Fed’s rate-setting Federal Open Market Committee -- the “most likely case” is for U.S. growth of 2 percent with the economy continuing to add jobs. “So, I still see the probability of a recession this year or next year as being not elevated relative to any year,” he said Thursday.

The same day, former Fed Chair Janet Yellen also downplayed the risk and said there’s no reason for the U.S. central bank to cut rates.

“My baseline is I don’t see a recession,” she said. “I don’t think it’s likely. And I expect them to stay on hold during the year.”

Read More: Yellen Sees No U.S. Recession or Fed Rate Cuts in 2019

They were speaking days after the yield curve inverted for the first time since 2007, as yields on 3-month Treasury securities rose above 10-year yields. The inversion may indicate investors now think lower interest rates in the future are more likely than higher rates, a development that has historically preceded recessions.

“There’s a lot of reasons to think that it has been a recession predictor for reasons in the past that kind of don’t apply today,” Williams said. “It’s telling us that growth will be pretty modest” in the U.S. and global economies going forward, he added.

The New York Fed chief echoed the message from the FOMC’s most recent policy meeting, which concluded March 20. The committee left the target range for its benchmark overnight rate unchanged at 2.25 percent to 2.5 percent, and surprised investors by signaling it no longer expected it would be appropriate to raise interest rates in 2019.

Fed Chairman Jerome Powell explained the decision afterward by citing downgrades to the outlook for U.S. economic growth, in part due to a slowdown overseas.

Williams, who has a permanent vote on the FOMC, said the current unemployment and inflation rates in the U.S. are close to the Fed’s goals.

“From my point of view, monetary policy is around neutral in terms of the short-term interest rate,” he told reporters Thursday, referring to the level of rates that neither speed up nor brake growth. “Any development in the economy, whether it’s on the employment side or on the inflation side, that moved in a persistent way away from our objectives, one way or the other, would be a reason to rethink the path of policy going forward.”

Bullard, who is also an FOMC voter this year, told reporters in Madison, Wisconsin that he thought a recent spate of weak U.S. economic readings was probably temporary and “the notion of a rebound in the second quarter is a good forecast.”

“It would be premature to contemplate a rate cut here. I think you do want to watch the data closely. Most likely, the economy will be stronger in the second quarter,” he said. “You won’t really know that until you get to the July time frame. That it seems to me would be the next time you would revisit this.’’

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