john c williams : the economic outlook - the “ new normal ” is now remarks by mr john c williams, president and chief executive officer of the federal reserve bank of new york, at the economic club of new york, new york city, 6 march 2019. * * * as prepared for delivery thank you for the kind introduction. it ’ s a great pleasure to be here today and a huge honor to be joining the board of the economic club of new york. this institution has been an essential forum for debate for many decades, and i sincerely hope today will be no exception. i ’ m going to start with a spoiler : at a certain point during this speech i will talk about interest rates. i imagine that if i don ’ t, you ’ ll feel you ’ ve been shortchanged. so before i get going, i ’ ll give the usual 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. r - star now that ’ s out of the way, i want to take you back a long time ago, to a galaxy far, far away. it ’ s 2001 : destiny ’ s child is topping the charts, you were marveling over your motorola flip phone, and i was a young economist at the board of governors in washington, d. c. at the time, i was burning the midnight oil, along with a fellow economist, thomas laubach, trying to understand what the burst of productivity growth generated by the tech boom meant for interest rates, both in the short term and in the long run. this led us to develop a model for measuring r - star. i know what ’ s going through your mind : “ what is this r - star that you speak of? ” r - star is how economists describe the neutral or natural rate of interest. it ’ s the rate that we expect to prevail in the long run when interest rates are neither providing a boost to the economy nor trying to cool things down. it ’ s neither accommodative, nor contractionary. in other words, it ’ s the “ normal ” interest rate we expect in “ normal ” economic times. g - star one of the major factors determining r - star is … you guessed it, g - star! g - star is what economists mean when they describe trend growth, sustainable growth, or potential growth of the economy. the two main

. 4 percent puts us right at neutral. what does the future hold? so what does the future hold? with a strong labor market, moderate growth, and no sign of any significant inflationary pressures, the baseline outlook is quite favorable, as i ’ ve said. of course, there are a number of different scenarios that could play out over the year ahead. geopolitical uncertainty and other factors holding back growth may recede, and the u. s. economy could resume the robust trajectory of last year. or gdp growth could continue closer to trend, which is my own forecast. finally, there ’ s always a chance that downside risks could knock gdp growth off course. what will the response of the fed be? my short answer : it depends! i promised talk of interest rates, and here it is. i ’ ve said it before, and no doubt, i ’ ll say it as long as i work for a central bank. but in the current conditions the phrase takes on even more importance. our response will always be “ data dependent. ” when growth is well above trend, raising interest rates to keep the economy on a sustainable path is the right decision. equally, when faced with a crisis like the great recession, it ’ s incumbent upon policy makers to use every tool at their disposal to get the economy back on course. the base case outlook is looking good, but various uncertainties continue to loom large. therefore, we can afford to be flexible and wait for the data to guide our approach. in that context, the fomc decided to keep interest rates where they were at the most recent meeting, and noted the importance of patience in determining future policy actions. to use a nautical metaphor, guiding the u. s. economy is like steering a large ship. monetary policy decisions can leave a wake several miles long, with implications that reach far into the future. we ’ ll consider the full range of data, the headline statistics, the market indicators, and we ’ ll listen to our business contacts on the ground, as we aim to keep the economy on its current course of a strong labor market, sustainable growth, and 2 percent inflation. conclusion r - star provides a helpful framework, not just for thinking about monetary policy, but also for understanding the current progress of gdp growth and its likely trajectory over the coming years. moderate growth, both in the u. s. and the global economy, is far less alarming when you know what the underlying factors