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July 19, 2019, 4:07 a.m. EDT

Fed’s wisest strategy is to cut interest rates at first sign of economic distress, Williams says

New York Fed spokesman later says comment was theoretical

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By Greg Robb, MarketWatch


Bloomberg News/Landov Enlarge Image
New York Fed President John Williams walking with Fed Chairman Jerome Powell last summer at the annual Fed retreat in Jackson Hole, Wyo.

Given that its benchmark interest rate is so close to zero, the most effective strategy for the Federal Reserve is to cut rates at the first sign of trouble, said New York Fed President John Williams on Thursday.

“When you have only so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress,” Williams said in a speech at a research conference in New York.

Investors saw Williams’ comments as endorsing a half-point rate cut at the central bank’s next policy meeting on July 30-31.

But a New York Fed spokesman took issue with this characterization and said the talk was theoretical.

“This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting,” the spokesman said late Thursday.

In two days of testimony to Congress last week, Fed Chairman Jerome Powell signaled the central bank was prepared to ease monetary policy at the end of the month.

Powell cited slowing economic growth abroad and global trade-policy tensions as two signs of distress that were setting the stage for the Fed to cut rates.

Read: Fed’s Powell says trade worries restraining the economy, hints at interest-rate cuts soon

The Fed’s benchmark rate is now set at between 2.25% and 2.5%. Many other economists have argued the Fed should keep its powder dry with its ammunition so limited.

In his speech, Williams said this “wait-and-see” approach is fine when rates are far away from the so-called “zero lower bound.”

Williams has been a top researcher at the Fed for almost 20 years on the subject of the zero lower bound, when short-term rates can get stuck at zero and go no lower, even if poor economic and market conditions would call for deeply negative rates.

Some countries have experimented with negative rates, but the idea is not popular with the Fed. Rates can’t go deeply negative because households will simply hold their savings as cash rather than pay their banks to hold their deposits.

Williams said a quick rate cut was similar to a vaccination. “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,” he said.

Traders in the fed funds futures market boosted their expectations of a half-point rate cut by the Fed following the speech. They now see more than a 50% chance of a big move, up from 34% a day ago.

George Selgin, a monetary policy expert at the Cato Institute, tweeted that the New York Fed’s comments translated into support for a quarter-point cut.

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