John Williams will assume a top position at the U.S. Federal Reserve, and brings with him policy expertise, and perhaps a dovish disposition on rates.

The Federal Reserve Bank of New York in early April named John Williams as its next president. Williams, currently the president of the San Francisco Fed, will oversee the operational functions of the New York Fed starting in mid-June and have a permanent vote on the Federal Open Market Committee (FOMC). Williams is a well-regarded monetary policy expert and something of a thought leader within the Fed’s system. While he has little experience of markets, his selection sends a strong message of policy continuity. In another nod to continuity, it is also being widely reported that the White House is likely to nominate Richard Clarida as Vice Chair of the FOMC. It’s also hard to see him as a radical, or as someone likely to try to lead the Fed in a different direction.

Williams is probably pretty much at the center of the FOMC in his near-term policy outlook. But, he may be a bit dovish over the medium term. He has done some important work on the neutral fed funds rate. The findings show the current neutral rate as quite low, and that the Fed has to be very cautious about raising rates above the neutral rate. Williams is also unhappy about the 2% inflation target.

The argument is that the 2% target is too low to allow the Fed enough policy flexibility, which risks creating reliance on unconventional monetary policy tools. An obvious alternative is price level targeting, which will require the Fed to run a higher rate of inflation in some years to offset periods of lower inflation. Both these factors suggest that, beyond the debate about the next few hikes, Williams is likely to be cautious.

Williams is a well-regarded monetary policy expert and something of a thought leader within the Fed’s system.

We still think the Fed will raise rates three more times this year. This pace, once a quarter, is higher than discounted in markets and puts us among the somewhat more hawkish group of Fed watchers.

Putnam Investments | putnam.com | 5 Underlying growth story positive The data flow continues to be mixed. First-quarter gross domestic product is likely to be weak compared with growth in the fourth quarter, partly because of winter weather and because the fourth quarter was boosted by hurricane-related recovery spending. Still, the underlying growth story hasn’t changed, and capital expenditure indicators point to a modest boost to growth in the second half of 2018. The labor market report is the best indicator of this broadly steady outlook. While the headline jobs creation number in the latest report was lower than expectations, a lot of the weakness is from the weather effect, including the series of storms that hit the East Coast in March. We don’t expect any key changes in labor market trends. The latest data isn’t going to change any minds on the FOMC. The economy will pick up some speed in 2018 given the encouraging outlook for capex. Of course, how the trade conflict with China develops will have an important influence on the outlook, and there are clear downside risks. There may already be an impact on business confidence. However, the Fed’s confidence in the economy remains high, and if fears of widespread protectionism dissipate, the Fed will continue on its path of moderate policy tightening. U.S. capital expenditure (Capex) on the rise

Underlying growth story positive

The data flow continues to be mixed. First-quarter gross domestic product is likely to be weak compared with growth in the fourth quarter, partly because of winter weather and because the fourth quarter was boosted by hurricane-related recovery spending. Still, the underlying growth story hasn’t changed, and capital expenditure indicators point to a modest boost to growth in the second half of 2018. The labor market report is the best indicator of this broadly steady outlook.

The labor market report is the best indicator of this broadly
steady outlook.

While the headline jobs creation number in the latest report was lower than expectations, a lot of the weakness is from the weather effect, including the series of storms that hit the East Coast in March. We don’t expect any key changes in labor market trends. The latest data isn’t going to change any minds on the FOMC. The economy will pick up some speed in 2018 given the encouraging outlook for capex. Of course, how the trade conflict with China develops will have an important influence on the outlook, and there are clear downside risks. There may already be an impact on business confidence. However, the Fed’s confidence in the economy remains high, and if fears of widespread protectionism dissipate, the Fed will continue on its path of moderate policy tightening.


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