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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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