Federal Reserve officials lay out case for aggressive rate cuts

By Trevor Hunnicutt
FILE PHOTO: John C. Williams, president and CEO of the Federal Reserve Bank of New York speaks to the Economic Club of New York in the Manhattan borough of New York

By Trevor Hunnicutt

NEW YORK (Reuters) - Two influential Federal Reserve officials on Thursday sharpened their public case for acting, quickly if needed, to support the U.S. economy, reviving bets the central bank may deliver a double-barreled interest rate cut this month.

Absent clear-and-present signs of a recession, policymakers are suggesting the U.S.-China trade war is denting U.S. business confidence, and that a global manufacturing slowdown and domestic inflation below the Fed's target of 2% a year may be enough to act quickly and aggressively.

John Williams, vice chairman of the Fed's rate-setting committee and head of the regional Fed bank in New York that implements those policies, said when rates and inflation are low, policymakers cannot afford to keep their "powder dry" and wait for potential economic problems to materialise. He did not say whether that view meant he would support a cut later this month.

"It's better to take preventative measures than to wait for disaster to unfold," with rates in a range of 2.25-2.50% and closer to zero than has historically been the case, Williams told an academic conference in New York focussed on central banking issues. "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress."

Fed Board of Governors Vice Chair Richard Clarida, meanwhile, said policymakers might need to act early to stimulate the U.S. economy as an insurance policy against rising risks.

"You don't have to wait until things get so bad to have a dramatic series of rate cuts," Clarida said in an interview with the Fox Business Network. "You don't want to wait until data turns decisively if you can afford to."

Markets reacted swiftly to remarks by two of the most senior Fed officials next to Chairman Jerome Powell. They are among the 10 people who will vote on rates at the Fed's next policy meeting on July 30-31.

Traders in interest-rate futures are now betting policymakers will cut rates by half a percentage point at their July meeting, double the cut they expected just a day ago. Stocks gained on Thursday, while short-term bond yields sank.

In recent weeks, Fed policymakers have identified a host of concerns they think could end what is now the longest U.S. economic expansion on record. Williams sounded particularly concerned about inflation, with the Fed's preferred measure of prices gaining at a 1.6%-a-year pace right now.

"People may start to expect it to stay that way, creating a feedback loop, pushing inflation further down over the longer term," Williams said. "The lower average level of inflation translates into a lower level of interest rates cuts available during a downturn, making it even harder for policymakers to achieve their goals."

Taking quick action to cut rates in the face of "adverse economic conditions" and keeping rates lower for longer, Williams said, "should vaccinate the economy and protect it from the more insidious disease of too low inflation" or an economic disaster.

The arguments represent a sharp departure from the Fed's views only months ago. Last year, the central bank raised rates, citing expectations inflation would rise to its target. Earlier this year, Fed officials promised patience before taking any action on rates as they waited to see whether trade war and global slowdown risks took a significant bite out of growth.

In more recent weeks, policymakers have worried the trade war could be causing businesses to delay investments and spending. They have also worried that a slowdown in inflation expectations could force rates back to zero unless the Fed acts quickly.

Even policymakers seen as least likely to support a rate cut have been seemingly moving in the direction of supporting a speedy easing. Kansas City Fed President Esther George, for instance, on Wednesday suggested she might be willing to change rates if looming economic risks materialise.


(Reporting by Trevor Hunnicutt; Additional reporting by Jason Lange and Andrea Shalal in Washington and Ann Saphir in San Francisco; Editing by Tom Brown and Chris Reese)