By Michael S. Derby 

SOMERSET, N.J. -- New York Fed President John Williams said Friday what happens with short-term interest rates and the central bank's balance sheet drawdown will be driven this year by how the economy performs.

As such, Mr. Williams didn't offer firm guidance for the Fed's monetary policy plans, even as he expects to see the economy do well again in 2019. "The economy is strong, the outlook is healthy, and my number one priority is using monetary policy to keep it that way," Mr. Williams said in the text of speech prepared for delivery before a banker's group in New Jersey.

For the Fed, "the approach we need is one of prudence, patience, and good judgment. The motto of 'data dependence' is more relevant than ever, " the policy maker said.

In addition to helming the regional Fed bank closest to financial markets, Mr. Williams also serves as vice chairman of the interest rate setting Federal Open Market Committee. His comments Friday were his first formal speech on the outlook since a television interview following the Fed's December policy meeting that resulted in the central bank's fourth rate rise in 2018. That move lifted the central bank's overnight target rate range to between 2.25% and 2.50%.

At that gathering Fed officials penciled in two rate increases for 2019. But a range of officials, from Chairman Jerome Powell through to the new voting member of the FOMC this year, have said over recent weeks the central bank faces no urgency to raise rates. Fed officials have acknowledged that volatile markets focused on downside risks, a slowing global economy and a lack of notable upward inflation pressures gives them space before making another decision on interest rates.

In his speech, Mr. Williams explained the path for rates isn't set. He also said the Fed's effort to shrink its holdings of bonds bought during the financial crisis, now effectively on autopilot, could be tweaked if need be.

"If circumstances change, I will reassess our choices regarding monetary policy, including the path of balance sheet normalization," Mr. Williams said. "Data dependence applies to all that we do. And, as always, if the outlook deteriorates in a material way, we stand prepared to deploy all our policy tools as appropriate in support of the economy."

The official explained strong growth could call for more rate rises, but he added "if conditions turn out to be less robust, then I will adjust my policy views accordingly."

Still, Mr. Williams remained upbeat about what lies ahead. "A softer economic outlook doesn't mean we should prepare for doom and gloom," and it is likely that growth will come in between 2% and 2.5% in 2019. He said that sort of performance would be "consistent with a healthy, growing economy."

Mr. Williams said the job market is "strong" and called recent wage gains "encouraging." He added he expects inflation to hit the Fed's 2% target this year, but said "I don't see any worrying signs of inflationary pressures building."

But the Fed official also acknowledged the pessimism seen in some parts of financial markets and said, "I wish I could now tell you with certainty what will happen to the economy, but anyone who promises they can see into the future is a charlatan."

Write to Michael S. Derby at michael.derby@wsj.com

 

(END) Dow Jones Newswires

January 18, 2019 09:23 ET (14:23 GMT)

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