Conversation with Federal Reserve Bank of New York President & CEO John Williams | Global Conference

Monetary Policy Stance and Rate Cut Outlook

• John Williams views the economy as undergoing a gradual "balancing" of supply and demand, a process deemed critical for returning inflation to a sustained 2% target.
• The Federal Reserve is not tracking a specific timeline for rate cuts; decisions will depend on the "totality of the data" across the employment market, housing, and various forward/backward-looking indicators.
• Current monetary policy remains "restrictive" and appropriately calibrated, allowing time for additional information before considering rate reductions.
• Williams emphasizes avoiding overreaction to individual monthly data releases in favor of observing trends over the last year and a half.
• The Fed's primary objective is to achieve maximum employment and price stability; policy adjustments will follow confirmation that progress is being made on both fronts.

Labor Market Dynamics and Supply Shocks

• Recent data indicates slowing wage growth and slowing job growth, yet the labor market remains strong with unemployment consistently below 4% for over two years.
• Post-pandemic recovery has been driven by three positive supply-side shocks:
  • Labor Force Participation: A significant rebound from pandemic lows is occurring.
  • Immigration: Continued strong increases in the labor force through immigration.
  • Productivity: Notable growth in productivity, though Williams cautions against labeling this a "new rapid productivity regime" without further confirmation.
• Williams notes that labor force participation gains are likely nearing their peak, while productivity growth remains a "wild card" dependent on whether the trend is structural or a temporary post-pandemic rebound.
• Demographic trends present a long-term challenge: lower global birth rates and increased longevity are driving higher savings and lower investment demand, which historically pushes long-term interest rates down.

Artificial Intelligence and Productivity

• AI is currently driving significant business investment, particularly in financial services and technology, but its impact on aggregate productivity is not yet visible as the technology is in its early stages.
• Historical precedent suggests years typically pass before new technology investments translate into measurable productivity gains.
• The net economic impact of AI depends on its application: transformative gains are possible if used to create new products/capabilities, whereas using it merely for cost-cutting could negatively affect labor force participation.
• The New York Fed is currently in an "analyzing" phase regarding AI, focusing on understanding its application while navigating data security and the risk of inadvertent information leaks.

Economic Growth Forecasts and Consumer Spending

• U.S. GDP growth for the previous year was 3.1%, largely attributed to the aforementioned supply-side boosts.
• Williams forecasts GDP growth for the current year to moderate to between 2% and 2.5%, aligning with the economy's trend growth rate as it moves into better balance.
• Consumer spending remains robust but is showing signs of divergence:
  • Lower/Moderate Income: Spending has cooled as excess pandemic savings have been largely depleted; credit card and auto loan delinquency rates are beginning to rise.
  • Upper Income: Spending remains strong, supported by rising equity values and household wealth.
• While some sectors suggest a "K-shaped" recovery, Williams frames the broader economy as healthy but growing at a slower, more sustainable pace.

Fiscal Policy, Quantitative Tightening, and Global Risks

• The Federal Reserve's balance sheet has shrunk by over $1.5 trillion via Quantitative Tightening (QT) with minimal market disruption; the process is proceeding as expected.
• Regarding fiscal deficits, the Fed observes that increased government debt issuance has not yet caused market disruption, though it may contribute to somewhat higher global interest rates.
• The "end game" of Basel III bank regulations is under review by the Federal Reserve Board in Washington; while industry warns of lending constraints, the Fed is carefully weighing feedback to ensure appropriate implementation.
• Geopolitical tensions, specifically the war in Ukraine, have introduced greater volatility and fragility to the global economy, potentially reversing some of the low-volatility trends seen in the 1990s and 2000s.
• Trade fragmentation and supply chain relocalization (e.g., to Mexico) are evident but have not yet resulted in a fundamental reduction in global trade volumes.
• The transition to green energy and defense spending represents potential drivers for increased investment that could offset the long-term downward pressure on interest rates caused by demographics.
• Williams concludes that the era of very low volatility is likely behind the global economy, necessitating preparedness for more frequent supply shocks and uncertainty.