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Top Official Says the Fed Will Adjust if the Economy Weakens Fed Official Tries to Soothe Nervous Investors
(about 7 hours later)
WASHINGTON — A senior Federal Reserve official soothed financial markets on Friday morning, emphasizing that the Fed is paying attention to concerns about economic growth, and will adjust its plans as necessary. WASHINGTON — A senior Federal Reserve official sought to soothe financial markets on Friday, emphasizing that the Fed is paying attention to investors’ concerns that the economic expansion is weakening.
“We’re going to go into the new year with eyes wide open, willing to read the data, listen to what people are saying, and to reassess the economic outlook,” John Williams, the president of the Federal Reserve Bank of New York, said in an interview with CNBC. John Williams, the president of the Federal Reserve Bank of New York, defended the Fed’s decision to raise its benchmark interest rate on Wednesday, and said the central bank expected economic growth to remain strong enough that it would need to continue raising interest rates in 2019.
Mr. Williams defended the Fed’s decision to raise its benchmark interest rate on Wednesday. He reiterated that the Fed expects the economy to remain strong, and that it plans to continue raising interest rates if the forecast holds. But he said that the Fed’s expectations should not be seen as promises. If growth weakens, he said that the Fed would adjust. But he said plans were not promises and that, if the economy weakens, the Fed will adjust.
The emphasis on flexibility drew an immediate reaction from investors. The S&P 500 stock index rose as Mr. Williams spoke, and was up about one percentage point on the day as of 10:30 a.m. Friday. “We’re going to go into the new year with eyes wide open, willing to read the data, listen to what we’re hearing, reassess our economic outlook and take the right policy decisions that will keep this economy strong,” Mr. Williams said in an interview with CNBC that aired shortly after markets opened on Friday.
The content of Mr. Williams’s remarks closely resembled the views that the Fed’s chairman, Jerome H. Powell, offered at a Wednesday news conference that sent stock markets tumbling. The difference was a matter of emphasis, but that appeared to be enough. The emphasis on flexibility drew an immediate reaction from investors. The S&P 500 stock index rose as Mr. Williams spoke, briefly posting a 1 percent gain. But Mr. Williams’s message was not enough to reverse the downward momentum in equity markets, which have been rattled by the prospect of a government shutdown on top of global economic weakness and trade uncertainty. By the end of the day, the S&P index was down 2.1 percent to end the worst week for American equity markets since the 2008 financial crisis.
The remarks carried particular weight because Mr. Williams is the vice chairman of the Fed’s policymaking committee. A well-respected economist, he served as president of the Federal Reserve Bank of San Francisco before joining the New York Fed this year. The contrast between the apparent strength of the domestic economy and the downturn in stock prices partly reflects the weakness of economic growth in foreign markets, where American companies reap a large share of their profits. It also reflects a striking divergence in views about the economic outlook.
Mr. Williams said that “the economy is strong, and we expect a healthy economy going into 2019.” The Fed expects economic growth to continue next year. Many equity investors appear to disagree.
But he said several times that the Fed is aware that many investors have a bleaker outlook, and that the Fed is paying attention to those concerns. The Fed will see who is right, and then it will make decisions. So far, the data seems to be on the Fed’s side. The Commerce Department reported on Friday that consumer spending remained strong in November, increasing for the ninth consecutive month. In the same report, it said that inflation had weakened modestly. The department’s index of personal consumption expenditures rose by 1.8 percent over the 12 months through November.
The index is the Fed’s preferred measure of inflation, and the latest reading indicates the central bank is likely to undershoot its target of 2 percent annual inflation for the seventh straight year.
Stephen Stanley, chief economist at Amherst Pierpont, said pessimism in financial markets was strikingly at odds with the latest economic data. “The consumer is on fire,” Mr. Stanley wrote in a note to clients. “If the stock market is trying to signal that the U.S. economy is crumbling, Mr. Market is wrong.”
In an interview, Mr. Stanley said that investors were also unduly concerned about the impact of the Fed’s rate increases. The Fed’s benchmark rate is now in a range of 2.25 percent to 2.5 percent, a level that Mr. Stanley said was still likely to provide a little stimulus to economic growth.
“I don’t think the Fed is tapping the brakes yet,” he said.
The White House, by contrast, continued to warn on Friday that the Fed was jeopardizing economic growth by repeatedly raising interest rates. Peter Navarro, the director of the president’s National Trade Council, told the Japanese publication Nikkei Asian Review that the Fed’s forecast of two rate increases next year was “two too many.” Mr. Navarro added, “We don’t understand why the Fed is acting so contractionary, at a time when there’s no inflation to worry about.”
While President Trump has also warned the Fed to stop raising rates, another White House official, Kevin Hassett, the chairman of the president’s Council of Economic Advisers, later disputed that Mr. Navarro spoke for the administration.
“I would not concur with Peter,” Mr. Hassett told CNBC. “I think the appropriate position for an economist in the White House is to respect the independence of the Fed and not comment on their policies.”
Mr. Williams’s appearance on Friday morning was carefully calibrated. Fed officials are barred from speaking publicly about policy on the day after a policy meeting, so Friday offered the earliest opportunity to address the market’s reaction to Wednesday’s decision.
Mr. Williams is also the vice chairman of the Fed’s policymaking committee, and a close adviser to the Fed’s chairman, Jerome H. Powell, giving his words added weight.
The content of his remarks closely resembled the views that Mr. Powell offered at a Wednesday news conference that sent markets tumbling. He said that the Fed thought the economy was strong, and would remain strong, and that most Fed officials expected the central bank to raise rates twice in 2019.
But there was a marked difference in emphasis. Mr. Williams said several times that the Fed was aware that many investors had a bleaker outlook, and that economic conditions would dictate the Fed’s decision.
“We are not sitting there thinking we know for sure what’s going to happen,” he said.“We are not sitting there thinking we know for sure what’s going to happen,” he said.
The Fed, he said, is ready to “reassess and re-evaluate.” Mr. Williams also sought to make the case that investors had overlooked some of the nuances in the policy statement the Fed released on Wednesday. He noted that in previous statements the Fed said it “expects” to continue raising interest rates, while in the most recent statement it used the word “judges.” This was intended to reflect increased uncertainty about the outlook, Mr. Williams said.
The Fed also included new language saying it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”