New York Fed President John Williams speaks with Yahoo Finance [Transcript]

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·20 min read

John Williams, president of the Federal Reserve Bank of New York, spoke with Yahoo Finance to discuss the labor market and the next steps for Fed policy.

Below is a transcript of his appearance on June 3, 2021.

BRIAN CHEUNG: Joining us here in a Yahoo Finance exclusive interview is New York Fed President John Williams. Thank you so much for joining us here on the platform this afternoon. Obviously I want to kick things off with the economic data. A lot of eyes on the jobs report covering the month of May that'll be released tomorrow. The street's expecting 5.9% unemployment. Non farm payroll estimates are bouncing somewhere in the 674,000 range. I just want to ask you: What do you expect to see, or maybe rather, what would you like to see in that jobs print tomorrow morning?

JOHN WILLIAMS: Well, you know, Brian. Great to be here with you today. You know first of all what I would like to see is, you know, strong job growth. I'm very focused on achieving maximum employment. Its going to take more than one month to get there, of course, but I definitely would like to see a strong labor report in terms of job growth, continued progress on the economic recovery and trying to get the country back to full— the country's economy back to full strength.

BRIAN CHEUNG: Now all we were speaking with Rich Clarida, the vice chairman of the Fed, last week and he was saying that at the pace of job gains right now, obviously, given the kind of less-than-stellar report that we got for the month of April, it might not be until August 2022 until we recoup the 8 million or so jobs that were lost compared to pre-pandemic levels. From your view, what you're seeing in the New York area or in the country at large, why is that pace not faster? Are there certain things that are holding back, people from going back to their jobs.

JOHN WILLIAMS: This is an extraordinary situation we're in. The economy's reopening, supported by strong fiscal support and progress on vaccinations. I don't think this is a typical recession or typical recovery, so it's really hard to predict exactly the speed at which this happens. Clearly, the recent data show demand is strong and the supply side of the economy needs to catch up and grow at the same speed. So I think you know we'll have to see how that plays out over the coming months, but I, my view is overall we got very strong demand going forward for the rest of the year into next year, I expect the economy will adapt to the rapid recovery and we’re going to see very good jobs growth and expect to see really strong GDP growth this year and seeing good growth next year. So I think it's, you know, the overall picture is very positive. I think that the timing of all this and how quickly you know, people can be matched with jobs and businesses can reopen and all that can happen, we'll have to wait and see on that, but I'm pretty optimistic that that's going to happen. It just may take some time to get all that to come together.

BRIAN CHEUNG: Now I want to expand on this some time, as it relates to quantitative easing in a second but I do want to just kind of stay on this labor market theme. Because you walk down Broadway here in New York, I'm in Brooklyn. There's a lot of kind of postings that you see on these businesses saying, we're looking for workers, we can't find workers. And obviously, that is what we're hearing anecdotally, across the country. But there's a many kinds of reasons for why people aren't going back to work, whether or not it's childcare or unemployment insurance. From your vantage point, what is the main kind of structural reason for why employers simply can't fill these jobs?

JOHN WILLIAMS: I wouldn’t call it structural reasons I think these are really just adjustments of the economy opening up really quickly. Because of the progress on vaccinations. Obviously supported by fiscal policy. The people are able to come back into the economy and spend money and that's really great. It's just gonna take some time, as it always does, for the businesses and others to adjust to that. Put out vacancies. We know that job vacancies are really high levels, take some time to interview people, get people on board. And as you pointed out, there are still people clearly worried about the health aspects of the pandemic. We're not completely through that and the other issues that you mentioned. I do think, again, this is a process that’s going to take several months to work itself out. But strong labor demand. People want to get back to work and they will. It’s just going to, I think again, take a matter of months or several months to see that progress. I do believe that businesses and the American economy is remarkably dynamic people. Businesses will figure out ways to move that process along quicker, get your people on board more quickly. Obviously I think you know wages will adjust with a strong economic rebound and we're also seeing huge numbers of new small businesses being created in the spirit of entrepreneurship out there. So all these dynamic factors, they don't happen overnight, but they are in play and I think will help accelerate the economy, getting back to full swing.

BRIAN CHEUNG: President Williams you did use the word “progress” and we know that the guiding light for the Federal Reserve with regards to quantitative easing is that it'll start to taper that $120 billion a month pace of asset purchases once it sees substantial further progress. Now, some of your colleagues in Philadelphia, in Dallas among others, have already said now might be the time to start thinking about thinking about tapering those asset purchases. Do you think it's time to start thinking about thinking about tapering those purchases?

JOHN WILLIAMS: We set that marker of substantial further progress back at the end of last year, and obviously, the economy has improved. I think it's on a good trajectory, but to my mind we’re still quite a ways off from reaching the substantial further progress that we're really looking for in terms of adjustments to our asset purchase program. That said we have to be thinking ahead, planning ahead and so I do think it makes sense for us to be thinking through the various options that we may have in the future. We're talking about talking about how the economy's doing, where we see it going, and understanding how that may play out over coming months really be thinking about those going forward. Right now my view is we're not near the substantial further progress marker, but of course we always need to be analyzing where we are in the economy, where is that relative to our maximum employment and price stability goals, and really how do we get monetary policy positioned well, to achieve those goals over coming years.

BRIAN CHEUNG: Okay so you're not going to bring up that conversation in two weeks?

JOHN WILLIAMS: Bring up?

BRIAN CHEUNG: The tapering conversation.

JOHN WILLIAMS: No, I think that we should be thinking through all of the issues around the economic recovery and thinking about policy options in the future. I just don't think the time is now to take any action.

BRIAN CHEUNG: Well, and some of that I guess might just be your approach or your views on inflation, there's a very rigorous debate right now about whether or not the current policy setting is going to allow inflation to maybe run away if the economy overheats. Now just broadly we did get a PCE print last week, core PCE when you strip out those more volatile components at about 3.1% year-over-year. We've heard your talking points about inflation being transitory but, what might you be looking for to see if some of those trends might be a little bit more secular and maybe less transitory or temporary?

JOHN WILLIAMS: As you know, price stability, low and stable inflation averaging 2% is one of our two key goals along with maximum employment. So I take this very seriously in watching the data carefully analyzing what's happening. This is again an extraordinary period of time as the economy opens up rapidly, and we're seeing demand, especially for certain things. People are willing to travel again and stay at hotels and get on planes and buy used cars apparently, because that market is very hot. So we're definitely seeing that dynamic play out and certain prices rise pretty quickly, while other parts of the economy, we haven't seen those kind of increases. We also have to keep in mind that some of the increases we’re seeing are really just reversals of price declines that happened a little over a year ago, when the pandemic really took hold. So it's really about, I think, analyzing the data carefully, understanding what represents maybe the unique aspects of the reopening of the economy, and not expected to persist into next year and the year after that, and what aspects do indicate maybe more kind of persistent or sustained inflationary dynamics. So it's really about you know carefully reading the data and analyzing it, and I would just say, not overreacting to every single data point, but making sure you're bringing all the information together. My personal view is that a big chunk of the increase in the inflation measures that we've seen is really partly this reversal price declines from before, what we often called base effects, plus some special factors like used cars and others where clearly the pandemic has affected demand for certain goods that are in short supply at least in the near term. I go back to this dynamic economy. I mean this is an economy that has worked on very limited inventories and very tight supply chains in the past, and with a pandemic, that's made it a little bit hard to adjust to the rapid reopening. So of course we're seeing some supply chain issues and shortages of supplies and things, but again, I see those as being worked out over the coming months and quarters, as businesses adjust to the more rapidly growing economy.

Last thing I'll say on inflation is, even before the pandemic and for many years, I do follow other inflation measures like the trimmed mean inflation rate, that are produced by my colleagues in Dallas and in Cleveland. And so those measures are designed to try to get the underlying inflation rate. At least so far, I think that they've been showing moderate increases in prices in a more consistent or near our 2% goal. So again, looking at all the information, and really be attuned to looking for signs that we're seeing a more persistent, sustained inflation, which of course we don't want inflation to be too much above our 2% goal. We really want to have this average 2% over time.

BRIAN CHEUNG: Well, a lot of interesting color on the macro picture there and I want to talk more about the kind of innards of the financial markets with regards to maybe a little bit of overnight reverse repo. But we'll have more of that discussion again with New York Fed President John Williams, on the other side of this break right here on Yahoo Finance, we'll be right back.

[COMMERCIAL BREAK]

BRIAN CHEUNG: Welcome back to Yahoo Finance, I'm Brian Cheung alongside New York Fed President John Williams. We're talking a bit about where the economy is right now, but the New York Fed also has interesting purview with regards to financial markets, it does a lot of the legwork in getting its quantitative easing asset purchases done. So I want to ask about some pressures that have been happening in the repo market, namely reverse repo, a lot of these money market funds have been bursting at the seams with cash because of the quantitative easing in addition to just the flow of U.S. Treasuries through the system. We've seen record subscriptions to the Fed’s reverse repo facility as of the last week, I believe last Thursday was the record. Just wondering if you could offer a little bit of color on that. It seems like it's abnormal. Is there too much money floating around in money markets from the Fed’s view?

JOHN WILLIAMS: No, the system is working exactly designed when we thought about it, set this stuff a long time ago, we wanted to make sure in a situation where we're making asset purchases, for monetary policy goals that you know the matching increase in liabilities would be distributed in the financial system efficiently and well. And a lot of it shows up in in the banking system as reserves, but also some of it can show up through the overnight reverse repo facility and we have seen that getting used quite a bit recently. We expected that to happen, it's working exactly as designed. Really no concerns about that, it is a system that was put in place so that we didn't have problems. And we're not having them. So to me it's working really well and the fact that funds are flowing between the banking system and our overnight reverse repo that’s what we would expect to happen in this circumstance.

BRIAN CHEUNG: Might we expect to see some changes to the cap to the overnight reverse repo or maybe even the payment or the interest that's paid on IOER to make sure that things are continuing to work properly, from that view?

JOHN WILLIAMS: Well, sure, we've made clear that in the past and actually going back to earlier days, we made technical adjustments to these administered rates and these programs specifically to make sure they're working well. And for me, achieving the FOMC’s goal of having the federal funds rate trading well within the target range. So we have the ability to adjust parameters of our administered rates or other parts of our program so that they work really well and keep interest rates where we want. So we can do that if that's called for, we've done it before and we’ve made those adjustments and I think they've been successful. So we have— not only is the program working exactly as designed, but we have the ability to tweak it, if you will, to make sure it's achieving exactly what the FOMC is looking for in terms of short-term interest rates.

BRIAN CHEUNG: We’ll keep it inside baseball, but we'll shift to a different topic when it comes to corporate bonds. So the announcement from the Fed yesterday that it's going to begin unwinding the $14 billion or so in corporate bonds and corporate bond ETFs that it had purchased to backstop the corporate bond market last year. It was the first time that the Fed did that, which means it's also going to be the first time the Fed is going to try and unwind that portfolio, which the New York Fed is going to be working on as I understand it. As the reserve bank that's carrying this out can you pull that off without making waves in the market and how do you think about this within the grand scheme of the Fed trying to get out of some of the programs that it had last year?

JOHN WILLIAMS: Right. And as you know, we put those programs in not just this one, but the others in the midst of extreme market distress and turmoil back in March and April and that period last year. And I would say that they across the board worked really well, both in making sure that markets were functioning well, and more importantly, that credit continued to flow to businesses to households to state and local governments. So those were put in in a bit of a moment of emergency when markets were under a lot of distress. They came in and did exactly what we were looking forward to making sure that credit is flowing as you know, credit is the lifeblood of the economy. And so they were successful. At the end of last year, most of those programs were shut down in terms of taking new business. And so of course some of those just end because they're doing shorter term lending. But for the corporate credit facility we did buy corporate bonds either through ETFs or individual bonds, and given the strength of the economic recovery, they are very good conditions in the corporate bond market, which is a very positive development for the economy. It's an appropriate time to gradually and carefully unwind those positions that we accumulated last year. So of course we're going to do this carefully, making sure there's orderly market functioning, the markets are working really well right now so I think it is appropriate. It’s a relatively small portfolio relative to the enormous corporate bond market.

So I think this is a good sign that financial markets are working well. Some of these emergency things that I think were hugely successful and did exactly what we wanted them to do, we don't need those anymore and we can close those down and and move on.

BRIAN CHEUNG: Now if we zoom out a little bit. Maybe this is something that the Fed would prefer, but it seems like maybe the Fed is not the top headline right now when it comes to finance news. People are reading things about Dogecoin or AMC stock. Just broadly speaking, when it comes to just the rise of retail investing, does any of that pose any sort of financial instability concern from your vantage point?

JOHN WILLIAMS: Well, it's something we take very seriously. We and the other regulatory agencies and in the U.S. government. It’s something to make sure that our financial system is both stable and serving the economy. Now, clearly there are questions that people are looking at in terms of investor protection and things like that that are really in terms of other regulatory agencies. But from my perspective, these issues don't really pose a financial stability concern. Where I look for financial stability concerns is really where you think about where there may be excessive risk taking or leverage in the financial system that could pose a broader concerns to the availability of the flow of credit. But obviously these are important issues, but I don't think these are ones that are particularly about financial stability.

BRIAN CHEUNG: Copy that and sorry there's a siren going by. You live in New York so you understand how this goes. But I do want to ask now about r* if I could do that. So there's been a lot of interesting commentary going on right now about how the Fed estimates what is the neutral rate of interest, kind of the rate that's neither stimulative nor restrictive for the economy, But there's been some commentary from the likes of Kristin Forbes at MIT and Jan Hatzius at Goldman Sachs about maybe missing the estimates with some of these structural things in play. Like companies that might be getting more productive with the COVID shock or demographic trends. So I guess my question to you is: estimates of our star are very low right now that's what's guiding your policy. How is the power of r* kind of changing with what could be structural changes to the economy?

JOHN WILLIAMS: Yeah obviously it's a question I think about a lot. I think a couple things I would say is: this COVID situation, or at least in terms of thinking about those trends and the effects on the neutral interest rate, it's just really challenging. We have huge shifts in demand and supply and all these things happening at once, I think it's time to be appropriately humble about our ability to draw inference about how does this affect the neutral rate for the next 10 years, because I think we're still in the middle of the COVID episode in terms of seeing how the economy behaves. So I'm kind of on a wait and see on some of that. Again, I do go back to what I think are the underlying trends that were driving the neutral interest rate lower for the past 25 years before COVID. It was demographics. It was low productivity growth, and I think it’s the demand globally for safe assets like U.S. Treasuries. So, those may have shifted a little bit and we'll wait and see whether productivity trends have improved as we've all learned to work with technology differently. We'll see if demographic trends have changed but I think those were the big drivers so those are the things I'd be looking at to see if there's really a change in the neutral rate. My view right now, again, recognizing there’s just a lot of uncertainty, is that neutral rates are still very low across the globe. And that's my working assumption, but I do think there's just a lot of uncertainty about that and we have to have an open mind about how that may have changed coming out of COVID. Last thing I just have to say on this: it’s a global phenomenon. For a lot of other countries I think a lot of these factors are still holding the neutral rate down, they haven't really changed.

BRIAN CHEUNG: I mean what might be the consequence, though, if the actual r* is above what you're estimating?

JOHN WILLIAMS: Well I think it would be a sign, mostly, of a stronger fundamentals for the economy. Stronger productivity growth, stronger labor force growth, some of those factors. So those are all positive, so I'd rather have— if I think about monetary policy, I’d rather have a stronger kind of baseline growth and labor market, as is what I'm aiming for in terms of maximum employment. So I think those would be very positive, and they would imply that in the long run you're gonna have on average, somewhat higher interest rates which would be consistent with a strong economy, but also clearly give us a little bit more room to adjust monetary policy when the economy is in a downturn or inflation is too low, so those are all positive. So, if you did ask me, what's a good thing long term for the economy it would be fundamental factors to help push up r* so I’m hoping for that but we'll have to wait and see if the data really does support those changes.

BRIAN CHEUNG: Well no one better to have that r* discussion with than you. But again thank you so much for joining us here on Yahoo Finance, New York Fed President John Williams, hope to talk to you again soon.

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