John C Williams: Monetary molicy - a "data dependent" approach
Remarks by Mr John C Williams, President and Chief Executive Officer of the Federal Reserve
Bank of New York, at the New Jersey Bankers Association's Economic Leadership Forum,
Somerset, New Jersey, 18 January 2019.
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As prepared for delivery
Introduction
Good morning everyone. I wish every conference I went to had such an incredible opening-
Joe's certainly a hard act to follow. I have a son who's a very talented artist, but he didn't get
those genes from me. So I'm going to stick to what I know-monetary policy.
Today I'll talk about the economy, how I'm assessing the outlook, and what that means for
monetary policy. It's early in the day, so I'll try and keep the recitation of facts and figures to a
minimum. But I know there are a lot of bankers in the room and that the direction of interest rates
plays a vital role in your business, so, rest assured, I won't skimp on that topic.
Given that I've promised to talk about interest rates, before I say another word I'll give the
standard Fed disclaimer that the views I express are mine alone and do not necessarily reflect
those of the Federal Open Market Committee or anyone else in the Federal Reserve System.
The Dual Mandate
I want to start this morning by reminding everyone what the goals of the Federal Reserve are. It's
easy to think of the Fed as just setting interest rates, and of course that's a major part of what we
do. But we do so in order to achieve two goals set by Congress: maximum employment and
price stability. In Fed-speak it's called the dual mandate.
There are serious debates taking place amongst economists and policymakers about what
maximum employment actually looks like, and they probably deserve another speech of their
own. But I promised not to deluge you with numbers, so I'll focus on a few highlights.
The unemployment rate last year averaged just under 4 percent, the lowest such annual figure
since 1969. The latest jobs numbers also showed very strong growth, with over 2.6 million jobs
added last year. The ongoing strength in the labor market has led to encouraging gains in wages.
No matter how you cut it, the labor market is strong, consistent with our maximum employment
goal.
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When we say price stability, our goal is to keep inflation around 2 percent. Those of you who are
of my generation will remember the runaway inflation of the 1970s and early 1980s. Obviously
that's something we must avoid repeating. But the challenge of more recent years actually hasn't
been too high inflation. Instead, it's been inflation that's persistently too low. Over the past
decade, inflation has more often than not come in below our goal.
But things are looking better. Underlying measures of inflation have been running just below 2
percent over the past 12 months, and I expect them to be right at 2 percent this year. And I don't
see any worrying signs of inflationary pressures building. So, from the perspective of the Fed's
dual mandate as a whole, things are looking very good.
Of course, for this healthy jobs market and low and stable inflation to persist, we need solid
growth in the economy. While GDP growth in 2018 looks to have been a robust 3 percent, we're
hearing anxiety both in the markets and the commentary, about what's to come in 2019.
I wish I could now tell you with certainty what will happen to the economy, but anyone who
promises they can see into the future is a charlatan. However, what I can do is provide you with
some insight into how I assess the health of the economy and what that means for my view on
the monetary policy decisions before us.
Data Dependent
I often say I'm data dependent, and I've talked about the major economic indicators, GDP growth,
inflation, and employment. But these headline numbers aren't the only things that inform my view
on monetary policy, or the economy more broadly. I'm looking at a whole raft of information about
what's going on and where risks may be lurking.
Employment and unemployment numbers provide a useful summary measure of what's
happening in the labor market. But "data" doesn't stop there. There are many sources of
information on labor market conditions that I regularly consult. They range from very granular
data that zero in on individuals' experiences in the labor market, to indices of job openings, how
many people are quitting their jobs, and labor market participation, to name a few.
But it's not just these hard numbers that matter. I also find surveys of households and
businesses provide valuable and timely perspectives about economic conditions. For example,
there's a questionnaire that asks people whether jobs are "hard to get." It's helpful because it
gives the perceptions of normal people (and not economists!) about whether there are a lot of
open positions. This survey continues to report that it's relatively easy to find work, which is a
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very good sign about the strength of the economy.
Beyond the economic data and surveys, financial market indicators are a critical source of
up-tothe minute information on how investors view the economy. In addition, stock prices and interest
rates affect the spending decisions of households and businesses, and the value of the dollar
affects demand for exports and imports, so these are important factors shaping the economy's
trajectory.
More broadly, I look at a wealth of data on international financial market developments and
banking conditions, which feed into my understanding of the global outlook.
Finally, and perhaps least well known, I spend a great deal of time speaking with members of the
public, at our Board and Advisory Group meetings, community and business leader forums, and
events like today's. I get immense value from their insights, whether it's the challenges they face
in filling positions, their plans for capital investments, or how global developments are influencing
their decisions. These discussions provide a huge amount of detail and texture to the economic
picture. One of the great strengths of the Federal Reserve System is our extensive networks of
contacts in our communities, and we share what we learn from these conversations when we
meet at the FOMC.
Being "data dependent" means taking this holistic view when thinking about the economy and
monetary policy. Not all of these types of data draw headlines the way shifts in the stock market
do, but together they provide a much richer and more complete depiction of what's happening.
And they also tell me whether the signals we're getting from the markets are reflected in the
economy as a whole.
2018 Tailwinds
In thinking about where the economy is heading, it's worth reflecting on where we were 12
months ago.
At the start of last year the message I was getting-from business leaders, economic data, and
the markets-was one of overwhelming positivity. This reflected three tailwinds: strong global
growth, fiscal stimulus, and quite accommodative financial conditions. Each of these was giving
the economy an extra boost. Indeed, these tailwinds provided even more of a boost over most of
2018 than forecasters had anticipated.
Fast forward 12 months and indicators in Europe and Asia point to less optimism about global
growth. The initial lift from the fiscal stimulus will likely wane over the course of this year. And
financial conditions have become less accommodative over the past several months. In addition,
we are now seeing some emerging headwinds to growth from the partial government shutdown
in the United States and elevated geopolitical uncertainties abroad.
Other "data" confirm that the winds in our sails have calmed. The headlines have been about
investors' concerns around growth, which have contributed to volatility in markets. This is also
showing through in surveys of households and businesses, who say that they are somewhat
less confident about future economic prospects. For example, the latest Empire State
Manufacturing Survey and New York Fed Business Leaders Survey both point to slowing growth
in the region. And there is no doubt that my colleagues and I are hearing the same thing directly
from our business and financial market contacts, who are more focused on the possibility of a
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weaker economic outlook this year.
But let me be clear: a softer economic outlook doesn't mean we should prepare for doom and
gloom. On the contrary, it's likely we'll see GDP growth somewhere between 2 and 21⁄2 percent
this year. That's a step down from 2018, but still consistent with a healthy, growing economy.
Supporting a Strong Economy
So, how should the Fed respond to an outlook of slowing growth and one that's less certain than,
say, this time last year? In a word: carefully.
At the start of 2018, when the economy was growing well above trend and interest rates still were
still quite low, gradually raising rates was the obvious and necessary choice. Twelve months
later, the tailwinds have lost their gust, interest rates are closer to normal levels, and inflation is
tame. The approach we need is one of prudence, patience, and good judgment. The motto of
"data dependence" is more relevant than ever.
If growth continues to come in well above sustainable levels, somewhat higher interest rates may
well be called for at some point. However, if conditions turn out to be less robust, then I will adjust
my policy views accordingly.
I assure you that I have my eyes wide open and my ear to the ground when it comes to thinking
about how the economic outlook will unfold in the year ahead, and as ever I'll be guided by the
data in all its forms.
The Balance Sheet
Aside from my views on interest rates, the other issue I get asked about is the normalization of
the balance sheet. When we first announced our plans in June 2017, I was poised to expound on
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them in great detail. But when I raised the topic I was sorely disappointed to be met with glazed
eyes and general indifference. Sadly, nobody seemed to care!
Now that's changed, and I'm getting more interest on this topic.
It's important to remember why the Fed took unconventional monetary policy actions in the first
place. Large-scale asset purchases, forward guidance on the future path of interest rates, and
seven years where the federal funds rate hovered close to zero, were all measures necessary
for the full recovery from the Great Recession.
A decade later and the FOMC has slowly but surely been moving monetary policy "back to
normal." We've moved interest rates closer to neutral, scaled back on forward guidance, and are
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over a year into the process of winding down the balance sheet.
Our goals throughout the policy normalization process have been twofold. First and foremost, to
support a strong, sustainable expansion of the economy. Second, to do this in a predictable and
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transparent way that creates as little disruption as possible. So far, this plan has worked very
well, with the economic expansion nearing record duration.
But it is important to stress that if circumstances change, I will reassess our choices regarding
monetary policy, including the path of balance sheet normalization. Data dependence applies to
all that we do. And, as always, if the outlook deteriorates in a material way, we stand prepared to
deploy all our policy tools as appropriate in support of the economy.
Conclusion
I'd like to conclude where I began, with the dual mandate. There's sometimes a view that Fed
policymakers are fixated on two data points: inflation and employment. And the reason is that's
how we're judged by Congress at doing our job.
But underpinning these is a strong economy, and ultimately that's what we're always using
monetary policy to support. So, as the year unfolds I've got my eyes wide open, looking at the
data and listening to experience-whether it's coming from household surveys, market
indicators, or from leaders in my District.
The economy is strong, the outlook is healthy, and my number one priority is using monetary
policy to keep it that way. In short, I'm watching, listening, and prepared to adjust my views
depending on the data.
1
For more information on how the FOMC specifies its goals, see Statement on Longer-Run Goals and Monetary
Policy Strategy, Board of Governors of the Federal Reserve System, amended January 30, 2018.
2
This question on whether jobs are "hard to get" is part of the survey conducted by Nielsen for the Conference
Board that is used to calculate the Conference Board's consumer confidence index. Information about the
survey, including the latest press release of the index, is available at www.conference-
board.org/data/consumerconfidence.cfm.
3
For example, the minutes of the December FOMC meeting stated that "Participants also reported hearing more
frequent concerns about the global economic outlook from business contacts" (page 8). Later on the same
page, the minutes said "However, contacts in a number of Districts appeared less upbeat than at the time of the
November meeting, as concerns about a variety of factors-including trade policy, waning fiscal stimulus,
slowing global economic growth, or financial market volatility-were reportedly beginning to weigh on business
sentiment." See Minutes of the Federal Open Market Committee: December 18-19, 2018, Board of Governors of
the Federal Reserve System, January 9, 2019.
4
See FOMC issues addendum to the Policy Normalization Principles and Plans, Board of Governors of the
Federal Reserve System, June 14, 2017.
5
See John C. Williams, 'Normal' Monetary Policy in Words and Deeds, September 28, 2018.
6
See FOMC Communications related to Policy Normalization, Board of Governors of the Federal Reserve
System, updated June 13, 2018.