Fed's Williams Supports June Hike, Sees 2% GDP Growth (Audio)

back could get you in real trouble. John Williams, President of San Francisco FED, And here we are in the beautiful Bay Area. It's great to be back with you, John. I want to drive right in though. Uh. You know you've been recently upbeat on the US economy and your most recent speech in March, you painted a picture of a growing economy. You're looking for two percent GDP growth at least this year, confident inflation is going to his target by the end of next year, and you've emphasize

the weakness overseas isn't decisive for the US economy. So, with all that in mind, were you on board last week with the Fed's decision to not move on interest rates. Yeah, say was, I mean, I think we are in a very data dependent mode. We want to make sure that we have a very good reading and understanding of what's happening both in the US economy in terms of growth, jobs, and inflation, but also also make sure we have a good read and what's happening globally because that does affect

the US economy. So I I am a supporter of the decisions we've made this year. Uh. That said, I do also support the statement we put out there, which is that I do expect us to be raising rates gradually over the next couple of years due to the strength and the labor marketing where I see inflation going. So, how are you looking at the US economy in light of that first quarter GDP figure? John, zero point five percent? And I know your team has has discounted it, not

just discounted it, but analyzed it. And you've looked at the seasonality in those first quarter numbers, how they tend that first quarter GDP for many years now has tended to be slower than forecast by a wide margin. In fact, your your economist, Glen Ruda Bush, has argued that if you account for that, it was probably closer one point six percent in the first quarter. Hasn't that statistical anomaly

been fixed? Though? Well, you know the Bureau of Economic Analysis that they have a lot of people working on this issue of what we call residual seasonality um, and I think they have made good improvements. They do a great job with the data. But this is an anomaly that,

as you mentioned, we've seen for many years now. So my own view is that the data in the first quarter, we do have to discount it a bit, and my view would be be closer to something like two percent growth or more consistent with what I see as underline trend. So overall, I haven't changed my view about what growth over the whole year will be around two percent real

GDP growth, which is what we saw last year. Quite apart from GDP though retail sales PC, you know, the personal consumption expenditutors, they came in on the week's side in the first quarter. Are you are is there a risk you overlook that signs other signs that the U. S economy actually lost momentum in the first quarter, and that's zero point five percent. Isn't such an anomally you know? Then you you average growth in the first the fourth quarter.

In the first quarter, this is a pretty week's are steen, which maybe makes that two percent plus a little bit harder to achieve. Well, you know, when I when I think about this again, we want to be data depending. I think this is another reason to be a little bit cautious in terms of jumping to conclusions either positive or negative based on the first quarter growth. I do want to see good consumer spending data in the next

couple of months. Do you want to see more signs that that anomalous reading the first quarter really was anomalous? So I agree with that point. I do tend to focus more on the employment data. Employment job gains have been really strong all the way through the latest data. Well we've seen you know, we'll get some more data

soon as well. But when you look at job growth, you look at unemployment, you look at labor force participation, in a lot of other indicators, labor market continues to improve. I think we're full employment or close to it on all these indicators. So I do take a pretty strong signal from the from the employment side, not just a g d P, which tends to be you know, volatile and subject to some of these revisions and other issues. So as we look ahead to the next meeting, and

obviously everyone's looking ahead to that meeting. So my yeah, and you're gonna go to Octionton, not St. Louis, but from San Francisco. What what do you need to see? You know, we've had strong jobs growth, but we haven't had inflation picking up very much. So what what does John Williams have to see when he sits down at the table in June to say yes, I'm arguing for

I'm on board for the great hike. So I think we need to see a continuation of the progress we have been seeing over the last year, seeing core or underlying measures of inflation continue to move generally up towards two percent. I'm not expecting to jump towards supercent, but be on a on the right trajectory consistent with my forecast that over the next couple of years inflation will

two years inflation will get back to two percent. I also want to see continue good job gains and continued signs of the economy as it has still good momentum. So I'm looking for a continuation of what we've been seeing, not for a big upside surprise. But obviously I don't need to see really strong just a continuation of what we have been seeing. So the status quo will be enough. Yeah, because again I think it would for me. It would resolve some of these little worries about Q one data.

What was that telling us. I don't take a strong signal from it, but I want to make sure that that's the right conclusion. And also this issue about uncertainty abroad and and in financial market turm Hall early in the year, we want to make sure that that didn't have a bigger impact on the US economy. So if I c S continue to add good number of jobs he you know, againing improvements in the economy, and good

signs on inflation, that would be enough. Good signs on inflation, but nothing because it's a forecast so far, right, John, and inflation has been undershooting for a long time. So in other words, you're willing to say, let's go ahead and raise interest rates again June, even if inflation is still a forecast and it has moved higher, that's right. As long as the inflation they are consistent with the forecast I have of moving towards two percent, that would

be enough. Now, you know, as you you mentioned, we've been missing undershooting inflation for quite some time. But you know, in terms of the and I take that seriously in terms of thinking about what's happening. But in terms of Monterey policy, Let's remember, interest rates are still very low. I'm not talking about having one interest rate increase, you know, in the next few months or whenever. Isn't making tight Monterey policy. It's just stepping back a little bit from

the very a comedy of Monterey policy. So it's not about tightening policy so much, it's just pulling back a little bit on the accommodation we've had in place. Well, because as you know, market expectations are once again a little bit out of sync with the FED. Because right now, basically you could say the markets are pricing in just

one interest rate increase. You've had people like Larry Fink from Black Rock and Jeff good Luck from a Double double line talking about just one interest rate increase this year. If that so? Uh, you said even two or three recently, not two, but even three rate increases are reasonable this year. What is it that you see the markets don't? What are the markets missing? Well, first of all, the markets

aren't one person. There are you know, millions of people involved in investing and making you know, uh forecasts and decisions around that. So there are different views. When I look at the markets, the data from the markets, what you see as a kind of a bimodal distribution. A lot of people think that the modal or the baseline cases, the one that I've laid out of, you know, unemployment continue to come down, good job growth to present GDP, and inflation moving back. You see this in the survey

of professional forecasts, the blue chip surveys. You see it from my own colleagues, in our own dot plots, in our own SEP forecast. There is this other part of the distribution which I under you know, I think of as related to concerns about Asia, concerns about Europe and Japan, the rest of the world. That there's this downside scenario where global growth really slows, other things happen, and that

that's a negative shock to the US. So obviously that's priced into the market, the possibility of a negative scenario that seems to get a lot of weight and investors minds. So my view that we should be gradually raising interest rates this year is based on the notion that we follow this baseline scenario, that the data continue to come in show the U s eCOM and continues to be on the good track, and under those conditions we should

raise rates. Clearly, if the downside, you know, risk really do happen, uh, the we see really negative effects in the US economy, then we should uh pause and and wait until it's appropriate to raise right. So I see the markets have trained kind of balance these two different scenarios and come to their best estimates of what we

should do. Uh. But you know again, I'm my My answer to your question really is, is the my baseline scenario where which is pretty optimistic and there was downtrack dependent raw on track, then the June rate hike is of a likelihood in your view, and certainly something you

would support at the very least. Well, So I don't want to see likelihood because you know, we're never supposed to talk about what's going to happen at f HOMC means where my colleagues are going to say, and then of course we're gonna get a lot of data between

now and then, and we love good discussions. But in my view, yes, it would be appropriate given all of the things we've talked about to to go on that that next step, But you know, a lot can happen between now in the middle of June, that's for sure.

What do you make of some of the data we've seen today, certainly the markets reacting to the slow down and manufacturing in China and slow down U Cake, We've got some mixed numbers earlier in the week, and of course our own one of our key manufacturing engages from the supply management heading back towards fifty again, does that give you any positure? Well, you know, I think again you have to look at all the data and analyze

it very carefully. And in terms of China, I think the story we're seeing, we've been seeing for the last couple of years, is that this pivot in China from a manufacturing export driven economy has been moving more to consumer goods, more to services, and so we've seen a kind of sequence of disappointments around Chinese manufacturing data, which I don't think really reflects the overall economy so much.

Is the fact that they are really are moving their economy from one um you know, kind of one focused to another, and I expect to see a continuation of kind of weaker manufacturing readings from China, but that but seeing stronger spending on consumer consumer spending and other indicators. In terms of the US, I think the manufacturing sector clearly has been hit by the fallen oil prices, which cuts back on drilling and oil uh you know, uh, drilling in those activities, which is buys off steel and

things like that. And obviously the strong dollar has affected a manufacturing sector. But I read the ice M. Actually data is is being pretty neutral. It's not that manufacturing is contracting or something, but just is growing modestly. Okay. You know, one of the things a lot of FED officials, including you, have downplayed is the weakness and oil prices. Is a strong dollar there transitory? How do you know those forces are transitory? And what if they're not, because

they've certainly been holding inflation down for a while. And again, the FED has this dual objective and one of them is hitting that inflation target. Yeah, And just to clarify is I don't view the oil prices as transitory. By their effect on inflation, as you suggested, is more transitory. We're seeing that, you know what, all the prices move up and down overall inflation moves up and down, but we're not seeing any obvious signs from movements and oil

prices onto major moves. UH can't pass through the core inflation rounderlying inflation, and that's kind of the second round effects that you worry about when you think about movements in commodity prices. Right now, I actually see, you know, oil prices have been factor pushing down inflation will add just with time, and the underlying inflation in services especially has been moving up. So again I'm kind of I'm

pretty confident that we're on the right track and inflation. Okay, Well, we're going to continue our conversation with San Francisco FED President John Williams on Bloomberg taking Stock for our radio program, and we certainly thank our Bloomberg TV listeners for joining

us today. So John, we want to continue now with this look at all the various factors that the markets are going over so or so Closely, I want to get back to this question inflation because I've been talking to a lot of Federal Reserve officials in St. Louis, Chicago here in San Francisco now, and one of the things I've heard is that inflation has undershot its target for so long that it's not only possibly not a bad idea, but actually a good idea to have inflation

at or above target for a while. But I don't think you're on board with that now. I don't think we want to aim for inflation above our two percent longer run goal on on purpose. What I would love to see is inflation be on reach two percent, sometimes half the time above, half the time a little below, but really just fluctuating around that two percent. So being a little bit above two percent is not something I worry about being uh you know, that doesn't worry me.

But again, I don't see us it's trying to target a high inflation rate, uh in the future. Now, you know, one of the things that we've made clear earlier with our one of our statements was that the goal was some metric, so two percents, not our ceiling. Really is the midpoint of where we want to see inflation, uh be. Now, my own forecast over the last year, I sometimes, based on my own views, you have inflation just moving right to two percent sometimes that we're shooting a little bit

due to the dynamics and inflation. Again, that that to me is not an important issue. A little bit of overshooting isn't a problem, but we don't want to purposefully try to create higher inflation. UH. In my view. UH, there's an interesting statistic I wonder if you've had a chance to look at, and that is, if you look at UH the year to date inflation rate for about two decades now, it is consistently run below two percent.

If you look at it that way, it's considered consistently undershot. UH. What does that tell us about perhaps some kind of secular change in this economy globally there's so much global disinflation, there's with some global deflation. As you studied this for so long over the years, John, not only UH as San Francisco FED president, but director of research and in all your academic studies, are you raising questions about this

now yourself? Well, you know, I I'm I may not be I may not be totally alone in this, but I'm one of the few people says I think the Phillips curve is alive. And well, I think that our understanding inflation has is UH, the models we've used over the last few decades. I think our good indicators you look at underlying inflation. So core inflation is run about

one point six percent of the last year UH. Some of that is due to lagged effects of a weaker economy, a lot of it's due to the strong dollar and some pass through energy prices into the core UH. If you look at the trim mean from the Dallas FED again, it's telling you the same kind of thing, about one or three chorus per cent or something like that. I don't think the inflation behavior right now is inconsistent with

standard models of inflation. It reflects the fact that we've been hit by a whole bunch of big shocks, the dollar strengthening by over for a while. Now it's come back a bit um, you know, the decline in oil prices and weak global growth more generally, so, I think these are factors have held us down on inflation the last few years. Obviously, the recession had a huge effect inflation in the US UH for many years. But again I don't see this as some kind of break in

the trend or behavior of inflation. I do think the good news here that we don't want to forget is we do have reasonably well anchored inflation expectations of the US. So you know that meant that we avoided deflation during the Great Recession, which was very important and today I think, you know, having well anchored inflation expectations is an important part of helping us get back to our our two percent goal um, and that's just something we want to preserve.

When ask you also, can you mentioned uh that uh the markets and market reaction and of course the first three months of the year, Uh, they're was a big market sell off watching China. Uh. One of the things that seemed to slow the Fed in its tracks because after looking at four interest rate increases in December at the f MC meeting by marsh the Fed said, you

know what it looks like, two are more prudent. Genet. Yellen, in her testimonies to Congress has has talked about the how the market impact really provide a certain amount of offset to some potential downward pressure on the US economy from the market turmoil, certainly bond yields being lower. You've you downplayed the only recent speech John the what the market was reacting to. You said, it wasn't so much just some rate move on the FEDS part. It was

all these other factors. But so many people in the markets have interpreted No. Number One, that the market saw the FED starting embarking on a series of rate hikes Number one, and then the FEDS seeing that and in a sense acknowledging in fact that this had unstabilized the market to degree that it less than the need for rate hikes this year. Or did you how did you look at that change then in the rate hike forecast

for did you not think it was necessary? Or did I sort of misunderstand you in that speech where you downplay the market when what we're reacting to, Well, I do think that the markets reacting a lot of different things, and obviously, talking to people in the markets, I hear this story about the Fed's role and concerns around that. My view is a lot of the reaction earlier this year was concerns about China slowing growth, concerns about very low inflation in the in the in the Euro Area, UH,

struggles in other countries as well. UH. So I think that a lot of it's really driven by things are happening outside the country. Importantly, though, those things happening outside the US come back and affect the US economy too, So we have to take that into account. The strengthening the dollar obviously was a big factor that pushes down inflation, slows our growth, uh you know, weak or growth abroad has those uh slows our growth in exports as well,

so we have to take them into account. So again, I think our forecasts have come down on for growth for sixteen um, you know. And I think that's consistent with the fact that there are changes in financial and global conditions that uh, that affect the US economy and then that feeds into the appropriate path for policy. So to me, it's not as huge as surprise that you know, the dots you know have moved out. Again, I'm not

speaking for why my colleagues had their own views. One of the things that I would just raise is based on you know, research a lot of people have done, is I think that as this recovery and expansion it goes on and on with very low interest rates, yet we're still only getting at or slightly above trend growth. It does make me think that this kind of neutral or equilibrium interest rate is lower than we previously thought. And you can see this in the kind of long

run interest rate projections from my colleagues. But a lot of economic academic literature is showing that, I think pretty persuasively that the new normal for interest rates is just much lower than we thought safe ten years ago. So today that the Median dot has the FED funds rate ending up a three and a quarter percent. If you would ask that same question fifteen, you know, years ago people were probably said something like, uh, four in a quarter or four and a half percent with a two

percent inflation rate. I actually think there's some downside to this. I think that maybe the new normal, the new natural interest rate, if you will, maybe even lower than one in a quarter. I think that some of these long run slowdowns and demographics proactivity growth. I know that you can talk to John fernald In my colleague who's a

leading expert on proctivty trans and studied this very extensively. Uh, and he's in his views on peractivity have been formed me on this is that you know, with slower growth globally and in the U S and many other countries, I think it does argue that the natural rate or normal interest rates are just gonna be much lower in the future. And we're also speaking to Mary Daily in this hour. She's ahead of researcher at the San Francisco

fed UM. One more question, again a criticism I've heard of a couple of economists lately that maybe you know you're stressing the strength of labor market, that you're stressing

head count over the demand for labor services. But basically, the number of jobs created exaggerates demand for labor services because accounts full time and part time workers equally, downplays the length of the work week, fails to address the fact that some of the jobs created our low wage, low skill jobs, and uh not recognizing the failure of wages to rise as also a lack of demand for

labor services. How do you look at that headcount versus the other side of the coin, How do you weigh that because that would suggest me to the labor market isn't sending such a strong signal. And that's a view that you know, many people have argued on the side that there's still some slack in the labor market and that you know, we we can continue easy, easy, continue

with our comedy and montey policy. So first of all, this is the best case you know I can make for why you know, at the FAT we need really top notch researchers to help us think through all these issues. You mentioned labor force participation. We talked about proctivity, we talked about uh, you know, in the natural rate of unemployment, you think about part time, UH for part time for economic reasons. All these issues about the labor market and

what's happening. How to think about that is what our team at the San Francisco BED works UH constantly on. It's helped to think a lot about and you're gonna get talk to Mary daily about that some more. And here's the way I see it is that, you know, during the Great Recession, there are a lot of big questions about what's happened to labor market? Is there a

new normal? Is is economy fundamentally shifted? And I think the good news here overall is that most of the research that I've seen is that the new economy is gonna be similar to the old economy. The normal unemployment rate about five percent. So that's good. It's it's not some kind of negative structural change in terms of labor force participation. The declines we've seen are mostly driven by demographics of retirement, the baby boom and things like that.

That again doesn't seem read the structural change. So you know, my my view, just to summarize on this, is that the wage Okay, you're to be able to talk to Mary about the wage data more, but I don't think that's sending such a negative single on this is taking stock the Fed in focus on bloom Word Radio. Two year government yields are negative in France, Germany, Italy, Spain, Sweden,

the Netherlands, Switzerland. So our negative interest rates deflationary or is their presence simply an indication that the demand for money and increase prices is now upon us. Let's find out more from the Federal Reserve President of the San Francisco FED, John Williams. He's joining my co host Kathleen Hayes in San Francisco. So, John Williams, negative interest rates, does that mean that people just don't even want to

borrow money? Well, what you've see negative interest rates in the countries where UH inflation is very low and in fact deflation has come up a number of times, and so it's too too many, I think people it's just a continuation of going from you know, normally positive interest rates down to zero and then moving to negative basically to try to move people to spend more money and to stimulate the economy and create more jobs and create some more inflation. So it's definitely a something we haven't

seen before. Really, Uh, do you believe that it works? I think it works in part because it brings down interest rates, as you just mentioned with all those two year yields, and I think a boost has a kind of the normal effects. I do think there's some negative effects to in terms of confidence and also I think in in terms of functioning a financial market. So we had the FED. You know, we've thought about this and decided we didn't want to go to negative interest rates. Instead,

we went to other other policy tools. Uh, And and I think that's what we would do in the future. But it's definitely something we're watching and trying to understand better because it's happening in so many other countries. Well, John, this leads me to look at the banking system, and broadly there's been a concern about reach for yield that if rates are so low and even negative, people will go out the respectrum just to make some money and

that could cause problems. But yesterday at the Milk and Institute conference, you said that you see a risk that the relentless demand for safe cash like assets could drive the creation of a dangerous instrument that repackages risky securities and calls them safe like Christ crisis era c dos within the next five years. Are you thinking of anything

specific right now? Obviously the FED banks oversee the banking system, and you've got some pretty important players, right so, you know, again at the conference, I was highlighting this as a as a risk down the road. I don't see this as a risk really emerging right now or in danger of emerging, but something that we need to be focused on.

And there were a lot of causes of the financial crisis, but clearly one of them was a global demand, extremely strong global demand for things that are appeared to be safe. Assets are very liquid, you could trade, you can uh do a repose on, and things like that. Um So with that huge demand that led to people being very

creative and engineering. What they thought of is uh taking mortgage mortgages and turning them into uh, you know, traunching them and turning them into different assets that had different risk characteristics. The problem was is that people got fooled that these risky assets were somehow cleansed of their risk through this process as opposed to the risk was still

was still there. And I do worry that the fundamental issue is huge global demand for safe assets has, if anything, gotten bigger and stronger today than it was in the past. So I think there is a potential down the road for financial institutions and financial engineers to come up with the next uh you know whatever, you know, whatever it will be, and I don't know what it will be, but uh kind of a process of repackaging risky assets and trying to sell them as say, does if that

have the tools to prevent that this time? Well, I think we we have the tools. In terms of the banking sector, I'm I think that we've accomplished a lot in terms of making sure our banking sector in the US and in our other regulatary agencies and other countries have also done the same to make sure they have adequate capital, you know, strong risk management, and all of those things. So I think the banking sector is a

much better position. But a lot of this creation of these money like or cash like instruments really happens outside the banking sector, into what we often call the shadow banking sector. So I think It's an area that we have to keep monitoring and making sure we understand and and and and realizing that the you know, the next financial crisis could be a very different thing than we saw last time. In trying to understand where those risks are.

What if you could speak to the issue of people who work and people who save what little money they have left over after they have spent what they need to live. Negative interest rates hurt them. If you want to stimulate spending, why don't you just give the money? Why take it away from them? Well, you know, giving people money is what you know, we were typically called fiscal policy, like tax cuts or government spending. So you know, central banks like the FED and the e c B

UH don't have the authority to do that. And in the end, the authority they do have is to to move interest rates up and down. I agree with the basic premise you pointed out, though, is a negative interest rates comes with quite a few with costs as as well as some benefits. And again, you know, I don't want to speak what would I do if I were in the in the e c B or another central

banks as they face really difficult challenges. But again it's one of the reasons in the In the u s of the FED, we have thought about this carefully numerous times and decided the negative interest rates was not the most effective tool, partly for the reasons that you laid out with it for other ones that I mentioned earlier too. Well. We're going to continue our conversation here with John Williams

at the San Francisco FED. We're going to be talking also with Mary Daily, she is the director of research at the San Francisco FED. We're gonna look at wage growth, won't you with wish your paycheck was getting bigger? Will Have FED certainly does because they like to see some more inflation and that could be a very important channel um.

Mary and her team have come up with some very interesting research which suggests that maybe the slowdown in wages wasn't caused exactly the way you thought, and why maybe the pickup isn't going to be either. On Kathleen Hayes in San Francisco, PIM Fox in New York, speaking with John Williams, he's president of the Federals Serve Bank of San Francisco. On Bloomberg Radio