Williams Says Fed Can Be Patient Amid U.S. Growth Slowdown

(Bloomberg) -- The Federal Reserve can afford to “wait” and watch incoming data amid a slowdown in U.S. economic growth before making another monetary policy move, said New York Fed President John Williams.

“The base case outlook is looking good, but various uncertainties continue to loom large," Williams said Wednesday during a speech in New York. “Therefore, we can afford to be flexible and wait for the data to guide our approach.”

Fed officials have signaled they're undecided about whether they will continue raising interest rates this year following a quarter-point hike in December. The increase contributed to a bout of financial-market volatility that extended into January.

Williams said he expects economic growth to slow to around 2 percent this year, matching his estimate of underlying trend growth, following an expansion of more than 3 percent in 2018.

He told the audience while answering questions after the speech that based on his reduced expectations for economic growth, “we don't need to tighten monetary policy maybe as much as I previously thought," but he left open the option of revising that opinion if the economy picked up speed.

"If this was kind of a head-fake, if the economy really did grow at 2.5 to 3 percent this year, if inflation did start picking up more, then obviously we'd have to reassess that," Williams said. "For the time being, I think we're in a good place, and I don't have any particular lean, the term you used, of where policy should be changing from where it is now."

Markets, Brexit

He cited the market turmoil among factors weighing on the economy, alongside a slowdown in global growth and geopolitical risks such as Brexit and the U.S.-China trade dispute.

“The tightening of financial conditions that occurred late last year will likely restrain consumer and business spending this year,” Williams said. “In fact, we have already seen a sustained slowing in housing construction, in part reflecting less favorable financing costs.”

Officials will release updated projections for interest rates after their next meeting on March 20. The last set of projections, published after the December meeting, showed the median participant on the policy-setting Federal Open Market Committee expected it would be appropriate to raise rates twice this year. Williams is the committee's vice chairman and holds a permanent vote on rate decisions, while other regional Fed presidents rotate in and out of the voting roster.

“Financial conditions have reversed partially the decline. That said, I think part of that is the reassessment monetary policy,” Williams said. “So, if we hadn't, I think, shifted our communication on the likely path of interest rates, I don't think financial conditions would have responded as much as they have.”

The New York Fed chief also weighed in on the central bank's balance sheet, which officials have been winding down. The Fed injected trillions of dollars of reserves into the banking system after the financial crisis via bond-buying programs that eventually swelled its balance sheet to a peak of $4.5 trillion. It fell below $4 trillion in February for the first time in six years.

As the Fed shrinks its balance sheet, policy makers are watching money markets for signs that reserves, which banks now use to satisfy liquidity requirements that were imposed in response to the crisis, are becoming scarce. They will probably stop the unwind process once they start to see those signals -- something officials have said could happen later this year.

But "right now, we're not seeing any signs of scarcity of reserves at all," Williams said.