John Williams, the president of the Federal Reserve Bank of New York, stoked expectations of an aggressive 50 basis-point interest rate cut by the US central bank this month, after touting the benefits of “preventive measures” to protect the economy.
In a speech on Thursday, Mr Williams laid out the case for early monetary easing in a low interest rate environment, likening it to a vaccination for children against illness down the road. “It’s better to deal with the short-term pain of a shot than to take the risk that they’ll contract a disease later on,” Mr Williams said.
The New York Fed chief added that policymakers should not keep their “powder dry” to preserve policy space for later. “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first signs of economic distress,” Mr Williams said.
The remarks sent Treasury yields falling. The benchmark 10-year US Treasury yield fell 4bp to 2.03 per cent, while the yield on the US government’s two-year bond fell 8bp to 1.76 per cent.
Before Mr Williams spoke, investors had priced in a roughly 40 per cent chance of a 50bp cut to the Fed’s target interest rate at the end of this month, according to futures prices. But that probability jumped to 64 per cent after his remarks.
Mr Williams is one of the top lieutenants of Jay Powell, the Fed chairman, along with Richard Clarida, the vice-chairman, making him a highly influential voice on the board of the US central bank.
His comments raise the likelihood that the Fed will proceed with an interest-rate cut when its monetary policymakers meet next on July 30-31, and suggest the US central bank could even double down on easing by cutting its main interest rate by more than the 25bp increments that it has typically used.
Citi became the first bank to change its interest rate forecasts in the wake of comments from Mr Williams and Mr Clarida, and is now predicting that the Fed will cut rates by 50bp in July.
Mr Williams’ dovish comments were reinforced by a passage of his speech — to the annual meeting of the Central Bank Research Association — in which he argued that the US long-term neutral rate of interest could be just 0.5 per cent. The neutral rate is the level of interest rates that neither stimulates nor dampens economic growth.*
Stocks rallied as much as 0.8 per cent, before paring back some of those gains. The dollar fell 0.5 per cent against its peers.
“A 50bp cut gives the Fed more optionality to watch the data,” said Jim Caron a portfolio manager at Morgan Stanley Investment Management. “If they go 25bp in July, they’ll have to go again in September. Why not get it over with?”
Earlier this week in Paris, Mr Powell said the Fed would “act as appropriate to sustain the expansion”, pointing to a variety of global factors clouding the US outlook, from trade tensions to a slowdown in world output growth and persistently low rates in major markets.
The decision to plough ahead with rate cuts — especially by two notches — as early as this month is at odds with the US economic data, however.
Despite some weak manufacturing and business investment data, recent indicators on the labour market and consumer spending have been strong, offering little indication the US is heading towards a recession. Meanwhile, equity markets have also performed well, with some indices reaching new highs this month.
In an interview with Fox Business Network on Thursday, Mr Clarida said the mostly rosy economic picture should not prevent the Fed from easing.
“You don’t have to wait until things get so bad to have a dramatic series of rate cuts,” he said. “You don’t want to wait until data turns decisively if you can afford to.”
The Fed’s drive towards lowering its main interest rate — which currently stands in a target range between 2.25 and 2.5 per cent — marks a sharp reversal of policy from last year, when Mr Powell engineered a series of rate increases.
Those increases triggered the wrath of US President Donald Trump. While the Fed has stressed its independence from any political influence, Mr Trump has been calling for at least a 50bp rate cut.
*This article has been amended to make clear the 0.5 per cent neutral rate is Mr Williams’ own estimate