Prospects for the U.S. economy have gotten "less rosy" in recent weeks as risks continue to cloud the outlook, Federal Reserve Bank of New York President John Williams said Sept. 4.
Slower global growth will reduce demand for U.S. exports and dampen the country's inflation and growth prospects, Williams said, adding that the U.S. outlook is "fundamentally tied to the fortunes of the economies around the world."
Williams spoke days before Fed officials head into a blackout period ahead of their Sept. 17 and 18 meeting, after which markets expect the Fed to cut its benchmark rate again by 25 basis points. The New York Fed president did not share his view on whether another rate cut would be appropriate but said "with an uncertain outlook, vigilance and flexibility are essential" for achieving the Fed's goals.
"Persistently low inflation, heightened uncertainty and global cross-currents make this a particularly challenging time for monetary policy, and my laser focus is on doing the best we can to support a strong economy and achieve our 2% inflation goal," Williams said in a speech in New York.
The world is already seeing signs of slower growth, with Germany, the U.K. and China each decelerating, Williams said. Other geopolitical risks continue to loom large, such as the prospect of a no-deal Brexit, political uncertainty in Italy and Hong Kong and an ongoing debt crisis in Argentina.
In the U.S., the trade battle with China is making businesses more cautious, and the "effects of this angst are already showing up in the investment numbers." Private nonresidential fixed investment fell 0.6% in the second quarter, according to the latest data from the Bureau of Economic Analysis, which also revised down its GDP estimates from last year.
"One implication of these revisions is that the economy's underlying momentum was already somewhat less robust than previously thought, even before recent developments pointed to a less rosy outlook," Williams said.
Williams, who voted for the Fed's July 31 rate cut, said the picture of the economy that emerged this summer "pointed to an outlook of slowing growth and inflation falling short of our goal," two factors that argued for looser policy from the Fed. The Fed's actions and communications have helped ease financial conditions that "should help sustain the expansion," he said.
The Fed's preferred inflation gauge, the core personal consumption expenditure price index, failed to hit the central bank's 2% goal again in July, rising by 1.6% year over year. On its own, inflation running somewhat below the Fed's goal "would not be such a big deal, especially with our economy strong."
"But the broader context is important," Williams said. "Ongoing disinflationary pressures from abroad, and the risk that inflation expectations in the U.S. may have drifted down after many years of inflation running below 2%, form an important part of this picture."
