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We want to take you to the stage here at Bloomberg invest Our own Michael McKee sitting down with the President of the New York Fed, John Williams. You're going to work against me, right, don will I start with the I guess you'd call it the orange elephant in the room, the tariffs that the President put on today. For a long time, you've been saying to me, it's too early to know the effect of the tariffs. Well, now we've got some details on the tariffs.
Your reaction, right, And I think the reason I was saying to you it's too early is because it really matters.
It matters you.
Know, which goods or where tariffs are applying, what countries, how long they apply for.
So there's you know, when you look at the research that looks.
At the effects of teriffs on the US economy, you know, one of the things that's highlights it depends whether it's consumer goods.
It depends on.
Whether it's goods that lots of kind trees produced, and a lot of things like that. So you know, it really made sense to let's wait and see find out more about what policies may be put in place, uh, and then kind of you know, come to I would say, you know, conditional judgments about.
What does it mean for the US economy. And as you said, we've we are seeing more.
Actual actions on tariffs in different dimensions. I would still highlight there's a lot of uncertainty. We don't know how long the tariffs will apply. We don't know what other countries may do in response to this.
We don't.
We also don't know what else may happen in this, uh, you know, in the in the kind of realm of trade policy. You My own view is that based on experience from previous episodes, based on analysis, is it you know, tariffs on consumer goods especially, they do feed into import prices pretty strongly. That does filter into prices that consumers pay.
That happens relatively soon.
Tariffs that feed into kind of intermediate inputs, the things that companies use to make other things and to make other things, those tend to pass through more gradually and have maybe last a little bit longer in terms of effects.
My view is that, you know, based on what we.
Know today, given all the uncertainties around that, you know, I do factory in some effects of tariffs now on inflation on prices, because I think we will see some of those effects later this year, not yet, but maybe later this year. I also you have to factor in how does that affect you know, economic activity, decisions by businesses to invest, consumers to spend, And that's where I think another big uncertainty is we've seen some kind of movements in the data in the last couple of months.
I think some of that's in anticipation of tariffs, So it's hard to really read the tea leaves there. But that's something else will be watching carefully, is to what extent is that affecting consumer confidence, business confidence, you know, the uncertainty around this and the effects of the tariffs
on economic growth and employment and things like that. So still a lot of uncertainty, I think directionally higher prices in the outlook, at least in mind kind of thinking about what's happening, but also a lot of uncertainly about how the economy responds to this.
The twenty eighteen playbook for the tariffs and Trump one point zero, basically outlined by the staff and the tailbook that year, suggested that you basically had two options. You could raise interest rates to fight inflation risk recession, or you could look through ignore the tariffs, assuming that they would be a one time rise in the price level but not an ongoing cause of inflation. What do you think this year, which of those two playbooks should you follow?
You're going to get little frustrated, And I answer the same way I answer the last question, Mike, and that is it depends on how these you know, what goods you know the tariffs apply to which countries, how long they're in place for, you know how big they are. So we have to depend on a lot of factors about how big the effects are and maybe how long these effects last. I do go back to the broader context of monetary policy. It's not just about tariffs or
trade policy. There's a lot of factors in influence a US economy, economic outlook, and the global economic outlook. You have to take all of those into consideration, look at the totality of the data, look at the risks and uncertainty, and what that means for achieving our maximum employment and price stability goals. So from my perspective, if you go back to the twenty eighteen kind of briefing, we got, you know, clearly you want to think about how long
lasting these are, how big the effects are. But I would just reinforce this point, there's a lot of uncertainty about that, and we need to be guided not only by our economic analysis, by our you know, absolutely fantastic staff who does all this work, but also what are we seeing in the data, what are we hearing from business leaders, what are we seeing in you know, out there in the economy, and then from that information kind of get a feel for which direction the economy is going,
both in terms of inflation and employment. I mean, the good news here is we're starting the US acadomy is starting in very good place. Unemployment is four percent, the labor market is stabilized after cooling from red hot conditions a couple of years ago. Inflation is two and a half percent, and it's you know, been gradually coming down towards our two percent goal. So we're starting with the
economy in a good place. And I would argue we had started it with a monetary policy in a good place, ready in a good position to adjust as needed depending on how the data and the outlook and the risk of the outlook evolved.
Well, given the uncertainty you talk about in the time span before we might see things show up. Is it fair to say that it's too early to consider changing interest rates at the March meeting?
Well, in my view, I think we need, you know, I think monetary policy is in a very good place. It is you know, modestly restrictive. It is helping keep the economy I think in good balance. I expect the economy to continue to grow this year, roughly in line with you know, the economy's potential. I expect inflation to would you know, over time move down back.
To our two percole.
So I think monetary policy has got the right, you know, kind of balance right now.
It makes sense.
To collect, you know, some more information not only about what's happening with trade policy, but obviously there's also what we're seeing in terms of other policies and fiscal policy and regulatory policy. So getting that whole picture and then watch what's happening here in our country but around the world and put all those together to see where monetary policy, you know, what the appropriate stance of policy will be. But to answer your question, I think the current place
where policy is good. I don't see a need to change it, right away.
All right, there you go, there's one market moving. You mentioned what information you're trying to collect from the companies that you speak to. Are the CEOs has lost as the FED and the rest of us in terms of what the impact of all this is going to be.
Well, I think when you talk to business leaders, the first thing that they tell you is they have to prepare for whatever happens. They're not sitting there having to guess, you know, well, this is what will happen or that will happen, but really think through strategically about how to manage you know, different scenarios and how to behave And I think one thing you're getting more of a sense of from some business leaders is, you know, kind of a view of let's be cautious about making big business
decisions right now. Let's get that additional information around what's happening in terms of this broad set of policies before making decisions.
I mean, measures of you.
Know, uncertainty are pretty high right now, and I think people are taking that into account as they think about, you know, maybe collect that more additional information before they make those decisions.
Well, as they try to put these things together, what's their underlying view of the economy and what they would do, and then how is this laid on top of it?
Well, you know, my again my view coming into this, you know, setting aside to say some of the trade policy issues that we're talking about, is the economy is very strong, very solid growth. We've had very good productivity growth, we have a solid labor market. Uh, and the economies and in good balance, and inflation is coming down. So
I think that's your starting place. And then the question is you know what happens with various policies and how does that you know what adjustments you have to make in your your thinking relative to that. But I, you know, firmly believe that we're starting the year not only in where we are today, but or the momentum we have.
Is good growth this year, slower growth.
Than say, last year, but and inflation, you know, inflationary pressure is coming down. Now of course you have to add to that any policy changes it affects them.
Well, that's the big question.
What are companies telling you about their plans for dealing with tariffs? Are they going to pass them through?
Well?
I think you know, again it gets it depends on which industry you're talking about.
It depends on uh uh.
You know, some tariffs are applying to may apply to some industries or goods and not to others. I mean, right now, I don't hear people literally say and here's how it works. I do go back to the experience of twenty eighteen, you talked about twenty nineteen, and also some of the experience of the pandemic. I mean, when producers or you know, retailers are confronted with much higher costs, you know, they have to figure out what to do, and they're going to you know, try to pass that on to their.
Customers as much as they can.
They're going to try to find probably some ways to adjust other margins of cost or prices, and you know, other competitors and things may take actions as well. So I think there's not a no, there's no kind of plan that every business has for that. But based on history, what we've seen is, you know, we see a pretty high pass through of tariffs into it least into the import crises.
Well, in twenty eighteen, you were looking up at the two percent inflation target and companies had no pricing power, and we were all very excited to go online and shop and get very big discounts that all changed after the COVID pandemic. Does that set us up in a different way to deal with rising prices, our companies going to say, hey, we did it, now, we can do it again.
Well, I do think that you're absolutely right.
You know, the conditions back then where inflation had underrun our target, you know, moderately for.
About a decade.
We were looking for inflation to get a little bit higher on a sustained basis of two percent, and the economy was strong.
The unemployment rate.
Was low in twenty eighteen twenty nineteen, so we're in a very good economy. And the actual policy actions that happened, both on fiscal policy and trade policy, I mean, they clearly.
Affected the economy.
We saw I think some boosts to inflation, short term boost to inflation, but it was in the context of economy that was you know, hadn't seen inflation for a long time. You know, the experience of the past few years has shown that businesses have become much more tuned to how to figure out how to pass on cost increases. They feel they have more pricing power. They've flexed that pricing power quite a bit during the time of shortage, and I think, you know, households also very sensitive to
prices high cost of many goods. So I think it is a different situation today, and you see this in surveys in other form, you know, we talk to people. It is different than it was in twenty eighteen, where really there is almost a decade of no inflation. So I think you have to it's a different context.
Well, speaking of surveys, recent surveys that have come out show people think inflation is going up, even at the longer term. The Michigan numbers for five to ten years are up. Are you worried that Americans are going to be much quicker to sort of the anchor their inflation expectations.
Well, it's obviously something I watch very closely. Inflation expectations, whether in surveys or market measures or from economists or something that's really important for us to study to understand where you know, the people are thinking about how they view future inflation and that feeds back into the economy.
So it's a really important topic. I can't help but point out that the New York Fed we carry out our own survey of households, survey of consumer expectations and study every month of the results from that survey.
So it's something I take seriously.
So what am I seeing in terms of the surveys I think on the Michigan survey. Clearly it's you know, the most recent readings have moved up quite a bit. That's something to watch closely. I'm not going to say it's not important. I do think that there are some aspects of the Michigan survey that might make it a bit sensitive to some spikes and things. We've seen that in the past, particularly kind of how they ask the question,
how they collect the data. There's nothing wrong with it, it's just we've seen that sometimes you'll get a big movement that gets reversed in our survey of consumer expectations that we've done, at least for the data we have, which is not the most recent data. You know, we haven't seen much of a movement in shorter longer run inflation expectations, but something I'll be watching closely.
One thing that definitely happens.
I think we're hearing from businesses and I think we are getting this from you know, some of the survey data, like in the Michigan survey, is the talk of tariffs. The sense that there's you know, higher prices you know out there is clearly influencing how people are thinking about inflation this year. I'm not seeing as much of an indication in most of these surveys that that's about long run inflation or inflation in the future, but more about inflation in the near term.
And clearly, you know, people are.
Experiencing some higher prices and are maybe more focused on that right now.
You have to come up with your own survey answers. At the March nineteenth meeting. In December, when you put out the last summary of economic projections, it was widely assumed that was sort of a dead letter when you put it out, because nobody knew what Trump was going to do, and by March you'd have a much better idea. Do you have any better idea or is this also going to be something we'll look at and go, we'll see you in June.
Well, you know, if you look at my website, I have this thing about research interests and it says monetary policy under uncertainty, And I think that that's a good good description of my job, because you always have uncertainty of uncertainty about policies. We went through the pandemic, We've gone through you know, various you know, events over the past several decades, so you're you're always dealing with that uncertainty and needing to make the best decisions, you know.
I do think relative December, clearly some of the actions have happened, and even the discussions in Congress when physical policy have provided you know, a better idea of the types of policies that may that we will or likely see. I still think that I don't have a lot of confidence in say the base case that this is my forecast for the economy, this is where it's going.
I'm much more in the kind of.
The mode of thinking, there's a bunch of scenarios that could happen. We could see this happen, the tariffs be very short lived, and then we move forward.
With there's other where you know, there's much you.
Know, more permanent or different, and so it's really thinking through these scenarios, thinking through what the risks those imply for achievement or maximum employment, price to ability goals, and then how do we position policy for that.
So it's not.
About getting the getting the right guests about where everything's going to happen. But it's really just getting policy position right. So that's how I'm thinking about So do I have more information that helps inform that, Yes, but it's still you know, I think that the base case a would you know, or the one that we're asked about, it's kind of the most likely scenario, is not the only one that's important. You really have to think through all the different paths that we could be on.
We along with the summary of economic projections comes everybody's favorite diagram from the FED of the dot plot. In December, you said two this year the consensus median was too rag cuts this year. As of today, we've priced in three in the futures markets. Do you think two is still a baseline or do you really have no idea.
At this point?
So, Mike, my whole attempt to say I'm not putting a lot of weight on my base case didn't work at all. Right, if I try it again now, I'm kidding. I think it's really hard to know. I mean, right now, the markets, as you say, they're pricing in three to four rate cuts this year based on futures.
If you look at the modal.
Expectation in the market, based on options, it looks maybe more like one or a little bit more than one cut this year. And again these are market expectations. I'm not making a prediction. I think that's actually really kind of informative. You know, market participants are trying to figure out, well, the modal case is.
Something like one cut or maybe a little bit more.
But there's just a wide dispersion of views out there. And it gets back to these scenarios. If you're in the market, you have to, you know, think about what are the different scenarios and position for that. Clearly, market participants are kind of thinking about some scenarios where they're protecting against scenarios where the you know, the FED needs to cut some.
More than the base case.
And I think, you know, I think, what's that's just reminding this is just you know, we're you know, there's a lot of uncertainty about economy, about the policies. I'm always just focused on one thing, which is, you know, how can we set policy and hopefully set a path of policy that you know, best achieves our goals. We're
starting in a good place. Let's just try to keep the economy on the right track to get the inflation down to two percent over the next couple of years and keep the you know, maintain the sustaining the strength in the economy and the labor market.
I want to switch over to the balance sheet because there's still a lot of interest in our projections. Basically are going to stop QT roughly the middle of this year, but there's also a paragraph in the last minutes that suggests that you might stop it early if the debt ceiling is not resolved, because that could affect liquidity. Is that a real possibility.
Well, let me explain you know that that notion. I mean right now, our strategy is hasn't changed. The strategy is we want to continue to reduce our holdings of treasury and mortgage backed securities until we get the level of reserves to what we is somewhat above ample. And that's something we study very carefully.
We have a lot of.
Information from market participants. We have various statistical and other analysis we do to try to measure or are we providing enough reserves into the banking system to achieve our interest rate control goals. So that is that is a strategy we put in place a couple of years ago.
We're still executing on that.
One of the things about that strategy is we need to be monitoring what's happening in money markets, what's happening, the repot markets, the FED funds markets, what's happening you know, you know, all these different indicators we're looking at. And with the debt ceiling dynamics that we're talking about here is that during a period of the debt ceiling, what happens is basically the Treasury spends out a lot of their money that they hold in account of the FED.
That actually increases reserves. As the debt ceiling is ended, that switches, and so you get big movements in reserve in the amount of reserves out there. There's really not driven by the demand by banks, So the financial sysm the kind of artificially moved around by you know, kind of the dynamics resulting from a debt ceiling issue. And so the point that we're really making is we want to have a good view of what's happening in the money markets, in what's happening in kind of in general there.
And this is in a way making it harder to see what's happening because these other movements driven by the debt ceiling dynamics are kind of clouding that picture. So the idea of either pausing or slowing the shrinking of the balance sheet temporarily was really just to make sure that we're you know, while during a period where we don't see things as well, but you know, we don't inadvertently get to a place where reserves are lower than we intend. So it isn't a change in the strategy.
It isn't a change in kind of what we're trying to do, But it's really about how do we best execute on that strategy in a way that achieves the shrink each of the balance sheet without any market disruption.
All right, we're getting a little low on time, so I'm going to shorten my questions. We'll do something of a lightning ground here. We know that FED defends its independence as important for good monetary policy. Are you worried about FED independence over the next four years.
I'm not worried about independence. I am obviously you know Field that FED independence or independence of central banks in general, is extremely important. We carry out our decisions or analysis. Everything we do is to achieve the goals you know that we've been given by Congress of maximum employment and price stability, where just you know, everybody who works in the FED is just committed to achieving those goals as best we can. It's not in any way influenced by
partisan or political influences. I think the evidence internationally is having an independent central bank gives you better outcomes for the economy for the people of the country. So it's not because it's not like I like independence because.
It feels good or it's comfortable.
It's because it's been shown to yield better results in terms of inflation and economic results. And that's why I think it's really important.
You've started your review of the monetary policy framework. Is you're expecting to find or do there's been criticism of the FED letting the economy run hot for too long. Do you need to get back to perhaps anticipatory rate moves to keep inflation in check.
Well, you know, obviously we are in the process of reviewing our framework, and that a very thorough discussion of a lot of lessons learned, so I won't comment on that. I do think you one important thing was, you know, the previous framework, which was institute in twenty twenty.
Was heavily influenced.
By the basically decade of very low inflation, interest rates near zero for seven years, and very unusual environment, and designed to address some of those issues, but at the same time, it was designed to be able to set us up for success if the opposite happened, if we
had high inflation or two. So although a lot of the attention on the twenty twenty framework was about the changes we made then, from twenty twelve through today, you know, our framework has always emphasized the importance of achieving two percent inflation, price stability, always emphasize the importance of well anchored inflation expectations, and I think just it has always been founded on this notion the price stability is essential
for economic prosperity. So that's always been there, that's not going to change, And I think, and again I'll just say, there was never any confusion about that or in any way did our framework interfere with us making the decisions we need to make to make sure that we ultimately restore price stability.
Well, let me tie it all together in one last question, because we're basically out of time. But given what's happening on the fiscal side and in Washington, given your review and given where we are in the economy, are we looking at a regime shift in the US economy, one that would lead to changes in the way you think about or perform monetary policy.
Well, I think, you know, the economy is US economy is amazingly dynamic.
I know that's a theme here.
You know, you know, we are the leaders in innovation, We are the leaders of you know, dynamism in the in the global economy. So you're always operating in changing environment. Fiscal policy is part of that. Other policies are part of that change. But in my thirty years of the FED, I've been through, you know, many different cycles of fundamental changes in our economy. When I you know, when I started out, we didn't have the Internet, we didn't have
a lot of things we take for granted. But I think, you know, from my point of view, we always need to be open to the fact that parts of the economy, parts of the global economy, of changing, and again, how do we take that into account, do our best to understand what that means for achieving our goals and make the right decisions. So is you know, are we seeing changes in you know.
Fiscal policy or trade policy?
Yes, but we but in the broader context, you know, my whole you know, I would say my whole career has been a time of various changes. We just have to be good at adapting to a changing environment and carrying out our mission.
John Williams, thank you very much for joining us today on