New York Fed President John Williams said the U.S. economy looks strong from the rear view mirror while the outlook is more mixed because of numerous uncertainties and risks.
"We have seen signs of the economy slowing somewhat," Williams said Wednesday during a talk in La Jolla, California. "We want to get monetary policy positioned to keep the economy growing at a sustainable pace."
Williams and his colleagues on the U.S. central bank's policy-setting Federal Open Market Committee voted Sept. 18 to cut their benchmark interest rate for a second time this year, following an initial reduction in July that marked the first since the financial crisis in 2008. They cited slowing global growth, trade policy uncertainty and muted inflation as key considerations.
U.S. stocks tumbled to the lowest since August Wednesday amid concerns about the health of global manufacturing. A closely-watched indicator of growth in U.S. manufacturing slumped in September to the lowest level in 10 years, according to a report published Tuesday. Data out Wednesday showed that hiring at U.S. companies is cooling.
The New York Fed chief also responded to questions about volatility in recent weeks in money markets, after a combination of corporate tax payments and a Treasury auction settlement drained billions of dollars from banks' reserve accounts at the Fed. The swift reduction in cash balances sent short-term interest rates surging in the market for repurchase agreements, or repos, forcing the New York Fed to intervene with overnight cash loans for the first time since the crisis.
When asked what's been keeping him awake at night, Williams answered: "These short-term interest rate moves and understanding what's going on."
"We saw interest rates moving up and not a lot of lending taking place between the banks that would keep those interest rates lower," he said.
Williams said the New York Fed is analyzing what happened in the last few weeks and studying its tools for intervening in the markets. The bank's response was very effective, he said.
The episode has raised questions about whether the Fed went too far in unwinding its balance sheet between the end of 2017 and July 2019.
The effort to partially unwind the $4.5 trillion bond portfolio the central bank amassed in the wake of the crisis, which has been criticized by U.S. President Donald Trump as an unnecessary tightening of monetary policy, gradually drained reserves from the banking system over that period. Now, Fed officials are saying they may have to resume expansion of the balance sheet soon to ensure appropriate liquidity.