MNI POLICY: Fed's Williams: Watching Downside Risks to Outlook

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve Bank of New York President John Williams

said Tuesday that weaker-than-expected growth or inflation, if sustained, would

argue for "somewhat more accommodation" in monetary policy. 

     The current stance of policy is "appropriate" for now to support the Fed's

baseline projection of continued moderate growth, a strong labor market and

inflation moving up to 2%, he told reporters after speaking at a financial

market conference in Washington. 

     "With inflation still below our target, and still seeing some downgrades to

the global outlook, I'm definitely watching more for some of the downside risks

to the outlook now," he said. 

     "Are these global factors or other things causing the U.S. economy to slow

more than expected and slow below trend growth on an ongoing basis? That would

be an argument for somewhat more accommodation. Similarly if inflation were to

move in the wrong direction on a sustained basis, then that'd be an argument to

consider more accommodation." 

     The Fed cut rates three times this year in an effort to head off weakness,

mainly as a result of a global slowdown and a rise in trade and geopolitical

uncertainty. 

     --RESERVES AMPLE

     The Fed's pool of bank reserves is back up to around $1.5 trillion and

markets have calmed since repo markets experienced acute funding stress in

September, Williams said. 

     While the factors contributing to the liquidity squeeze were known, the

size of the reaction was unexpectedly large, he said. 

     "People became more conservative" about holding onto reserves and lending

into the repo market in a stressed environment, Williams said. 

     However the episode raised questions about how markets are functioning and

why the level of reserves is as high as it is, he said. 

     Factors such as regulations, supervisory expectations and perhaps

institutional issues appear to be at play and need to be studied carefully. To

the extent that there are "unintended consequences and inefficiencies" in

regulations or the Fed's liquidity provision facilities, "we want to make sure

we understand them well," he said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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