WHEN: Today, Friday, December 21, 2018
WHERE: CNBC's "Squawk on the Street" – live from the Federal Reserve Bank of New York
The following is the unofficial transcript of a CNBC EXCLUSIVE interview with New York Federal Reserve President John Williams and CNBC's Steve Liesman on CNBC's "Squawk on the Street" (M-F 9AM – 11AM) today, Friday, December 21st. The following is a link to video of the interview on CNBC.com: https://www.cnbc.com/video/2018/12/21/cnbcs-full-interview-new-york-fed-president-john-williams.html.
All references must be sourced to CNBC.
CARL QUINTANILLA: Corporate issuance, a seven year low in terms of bonds. Let's get to Steve Liesman, our Senior Economics Reporter with the interview of the morning. Hey, Steve.
STEVE LIESMAN: Carl, good morning. I am live from the Federal Reserve Bank of New York with Federal Reserve Bank President John Williams. President Williams, thank you for joining us.
JOHN WILLIAMS: It's great to be here with you. And welcome to the New York Fed.
STEVE LIESMAN: Thanks. The market seems to be signaling that there's a severe slowdown coming. Bond yields are down. Stocks are considerably off where they were. The Federal Reserve raised rates, though, this past Wednesday, signaling additional rates. Is it your contention in the consensus forecast and your forecast that the market has the outlook wrong here?
JOHN WILLIAMS: No, I don't view this as about one side having it right or wrong. I think what we're – the really important message is the economy is strong, that's why we're seeing strength going into the New Year and we expect a healthy economy going in 2019 and that's our baseline expectation. However, we are listening very carefully to what's happening in markets for two reasons. One is financial conditions have important influence on the economic outlook, and we take that into account and think seriously about that. Second I think we are hearing something important from markets and that is a concern around risks to the economy and a potential slowdown further than we currently expect in our base case. So we listen carefully to that. We try to do our best to absorb that information and think hard about what are the various risks to the outlook besides the base case, which is really one of healthy and strong growth. I'd like to just reiterate something that is important about this conversation, is that we're moving to this more data dependent mode of -- Chairman Powell, I and others have highlights the fact that as we move away from this explicit forward guidance, that we're going to be much more driven by the data in thinking about the economic outlook and about our policy decisions. And for some people think they data means looking at the hard data, like the GDP data that came out or CPI data. But for us, data dependence means not only the economic data like that, but surveys of households and businesses that we and others conduct. It means listening and talking to people in financial markets, understanding what that's telling us both here and abroad. And finally, one of the strengths of the Federal Reserve System is we have the 12 Federal Reserve banks. We as presidents talk regularly to people in businesses who are telling us what's going on in -- today and how they're seeing things going forward.
STEVE LIESMAN: But tell me, if you're hearing the message from the market, I guess the question is: are you listening? In the sense that you that you went ahead and raised rates on Wednesday. How do you justify that if you are indeed listening to the market? And investors who are putting the money on the line have decided that, "A) There's not much inflation concern in my purchases of fixed income bonds. I'm looking for safety in fixed income. I'm going away from stocks. I don't see the robust economy you guys do." How will do you justify the rate increase if indeed you're listening to the message of the market?
JOHN WILLIAMS: Well, we're listening but we're also looking carefully at the data and also talking to business and other leaders in the communities around the country, and trying to incorporate that information together to get a view of the economy. So right now, as I said, we have a strong economy. We have about 3% growth this year, is what we expect. Unemployment is near 50-year lows and again, we expect this economy, although having somewhat slower growth next year but still very solid growth and good solid job gains. But importantly we are listening to the -- there are risks about outlook. There's clearly some concerns that maybe the economy will slow further. And we are sitting there – not sitting there thinking what we actually know for sure what's going to happen. What we're going to be doing coming into next year and through next year is reassessing our views of the economy, listening to not only markets but everybody that we talked to, look at the data and be ready to reassess and re-evaluate our views and obviously reassess and re-evaluate our policy stance.
STEVE LIESMAN: But John, after saying that you were considering -- not providing further guidance, the statement still says "some further rate hikes," so how data dependent are you really, if your statement already tells us you're still going up?
JOHN WILLIAMS: Well, I would make a couple comments about that. First of all, we made some changes -- important changes to our statement around that. One is we changed the word from "expects further gradual increases" to "judges." Now if you look it up in the dictionary, judges means – is, you know, we've made an opinion. It's our judgment or opinion. That's where we see things going. This is not a commitment or promise or in any way a sense that we know for sure that's what we're going to do. We are actually saying pretty clearly this is how we see it now based on our positive pretty optimistic view of the economy and we'll change that as needed. We also put the word "some" in front of "gradual increase" which is indicating that although we don't think we're done raising rates, we've made a lot progress in getting interest rates back to normal. Finally we did add the sentence, which I think is really important, is that 'the committee is monitoring and continues to monitor global economic and financial market developments and their impact – potential impact on the economic outlook.' So when we add a sentence like that, that's not just -- that has meaning, it's indicating to everybody that we're very focused on that and very attuned to the possibility that this outlook may change in coming months and we're going to be very focused on studying that and open to reassessing our views.
STEVE LIESMAN: You've been a Federal Reserve Bank President before – you were in San Francisco and now you've been in the Federal Reserve system for a long time. Can you remember a time when the market so much thought one thing and the Fed seems to be – to think another thing? And are you worried about a market and a Fed in terms of their outlook that are so on different pages here?
JOHN WILLIAMS: Well, you know, I think you have to be careful when you say "the market" because obviously we follow a lots markets, we have the stock market, bond market, currency markets, lots of other markets around the world. And so --
STEVE LIESMAN: If it were a Christmas hymnal they'd all be singing from the same book, it would seem.
JOHN WILLIAMS: -- but I think there are a lot of factors affecting the markets in the last few months beyond the just the economics -- the specifics of monetary policy of the economic outlook. Obviously concerns about global growth in China. We hear from business leaders quite a bit concerns around tariff and trade negotiations. So there's a – I would say a number of factors that are contributing to volatility and market moves. But our job is to carefully assess what we're learning from the markets from all the other information and come to our best judgment. In terms of this disconnect, I think the important thing is, is we are ready and I think we've proven over the years, that when we see changes in the economic outlook, we are ready to reassess that view and obviously we're ready to shift our view on monetary policy to vast achieve our goals of maximum employment and price stability. And that's what we're going to do.
STEVE LIESMAN: One of the things that many people in the market complained about was a comment by Federal Reserve Chairman Jay Powell that the Federal Reserve's balance sheet reduction planned to be reduced this year – or, sorry, in 2019 -- by $600 billion is on autopilot. Is that accurate that there's no change at all, kind of no matter basically what happens to the economy? That unless you're in a situation where you get to -- this is what Janet Yellen said to me in 2017, unless you get to a zero rate on the Fed funds, you're not going to alter the balance sheet reduction plan.
JOHN WILLIAMS: Well, I think you do need to take a step back. I think Chairman Powell was really thinking or referring to the baseline forecast. Again, of a strong economy, a healthy economy, and in that we've started the balance sheet normalization a little over a year ago. That's gone very smoothly so far. And assuming the economy continues to be strong, we continue to see strong job growth then the plan would be to stay on the path we're on. And I want to reinforce a point that we made in June of 2017 when we laid out the principles of our normalization and we tell you it has been repeated by Chairman Powell and others since then. And that is our baseline view and we do view that the movements in the federal funds rate is our primary instrument to adjust monetary policy in this baseline outlook. But we also highlighted two other things that are very important. First, is if there's a material deterioration in the economic outlook, obviously we will reconsider our path for the short term interest rate and would adjust policy to best achieve our goals. But we also said that we would reconsider the balance sheet normalization and may even end that process if that's the -- if that's appropriate to achieve our goals. And finally, we said in that statement in June of 2017 that if the economic situation calls for it, if it deteriorates to this extent, of course we would use all available tools to achieve our goals of maximum employment and price stability. So we did make all of these three points clear. And I just want to reiterate those for today.
STEVE LIESMAN: Fair enough. Are we at that point now where you are reconsidering the current plan to reduce the balance sheet by $600 billion?
JOHN WILLIAMS: So clearly the committee just met. We did not make a decision to change the balance sheet normalization right now. But as I said, we're going to go into the New Year with eyes wide open, willing to read the data, listen to what we're hearing, reassess our economic outlook and take the right policy decisions that will keep this economy strong, keep the expansion going and keep inflation near 2%.
STEVE LIESMAN: Yeah, but I have to press you on that question. Are you at a point where you think the plan as laid out to the markets to reduce the balance sheet should be reconsidered?
JOHN WILLIAMS: Not at this point. I think the economic outlook again is very strong. And I am personally of the view that we're on the right path. I obviously strongly supported a rate hike at a recent meeting, and I don't see the need today to change our balance sheet normalization.
STEVE LIESMAN: Good, let's step back. And I want to do -- look at that because I didn't get a chance to ask your general outlook for 2019. What's the economy look like? What's the path of growth? What happens to inflation unemployment?
JOHN WILLIAMS: Sure. And you know, my views, I think, are pretty consistent with many of my colleagues on the committee. I expect economic growth after coming a little above 3% to slow somewhat to about 2% to 2.5% next year. Part of this is what we were expecting all along as the economy kind of got a big boost this year from fiscal stimulus and some other factors to see growth slow somewhat. But, again, slowing to a pace is really still well above trend, a pace that means strong job gains and a pace that means unemployment coming down to around 3.5% next year. Again, in our lifetimes this is one of the lowest unemployment rates that we've seen. I also expect inflation to around 2% next year. Right now it's running, I see, at 1.9% and so --
STEVE LIESMAN: Core BCE as reported by Rick earlier. Yeah.
JOHN WILLIAMS: Right. And so that's, I think, very consistent. I mean, this is again the baseline forecast. It's a forecast where we're in the 10th year of expansion. If things go as planned, we're going to have the longest expansion in the history of the economy.
STEVE LIESMAN: Since you said you're at the consensus, is it right to think that in that scenario you now see if those numbers come to fruition two rate hikes in that context?
JOHN WILLIAMS: So, again, that would -- you go back to this projection and viewing, you know, this is based on my view of where the economy is now, and things can change, obviously, between now and over next year. But my view is that some – say something like two rate increases would make sense in the context of a really strong economy moving forward. But we're data dependent. We're going to adjust our views, as we've done over the years, depending on how the outlook changes.
STEVE LIESMAN: So I think it's worth having a conversation of what is strong. Right? We're going to do north of 3% and the consensus forecast for the Fed is down to 2.3%. That seems like a weakening economy to me.
JOHN WILLIAMS: Well, it's not weakening economy. It's obviously a growing economy. It's an economy where I see job growth quite strong. I mean let's remember, we've added over 2.25 million jobs this year already. We've added about 20 million jobs during this expansion so this is an economy that has generated enormous job growth, really pretty solid real wage gains for workers, solid income gains for the economy. And that's continuing into next year. So it's true, we're not going to expect -- I don't expect 3% growth next year but it's still above trend growth, solid job gain and solid real wage gains.
STEVE LIESMAN: John, it sounds to me the way you lay out and talk about the economy, you think the market has overdone here it on the pessimism. Are you surprised at how from an all-time high October 3, how incredibly the market has turned to now have this amazingly pessimistic views? Do you think it's wrong?
JOHN WILLIAMS: Well, you know, I talk to people in markets and we talk to people in markets quite a bit. And I think, you know, there are of course those times when there's disagreements about where the economy is going. What I sense is not so much a fundamental difference about is growth going to be 2% or 2.5%. I think there's more talk about concerns about downside risk – things that could wrong and whether it's around, you know, country -- the global economic situation or things like that. So I, you know, we're very attuned to downside risk. Maybe we emphasize a lot, our modal forecast, kind of where we expect the economy to go. But I think the markets are telling us something pretty clearly, that there are these downside risks that we need to be attuned to and watchful for. So I think it's not so much one side being right or wrong, it's just I think markets are very attuned to what could go wrong. And of course, we need to be so, as well.
STEVE LIESMAN: We should talk a little bit about those risks. How concerned are you about what you've seen in the global economic numbers. How does that affect the U.S?
JOHN WILLIAMS: Yeah, so I want to roll back about a year ago. Because I think that's actually helpful here. I think if you asked me, you know, last November or December, I would have expected pretty much trend like growth in the global economy in 2018 / 2019. What we then saw – so it was some pretty good data early on in the year. And I think all of us, honestly, and the market participants too, kind of got pretty optimistic. "Hey, we're seeing this synchronized global growth. The U.S. economy is doing well. The global economy is doing well." Well, in the end, the data kind of contradicted that narrative and we've seen, you know, a retrenchment of the view of global growth. But really more to just a kind of more of a trend like growth like we were expecting say a year ago. And so I view some of these swings in sentiment really was, maybe people got more optimistic earlier in the year around the growth.
STEVE LIESMAN: Too optimistic.
JOHN WILLIAMS: Well, in the end the end too optimistic. And now people are getting more realistic.
STEVE LIESMAN: But just getting back to it, John, several big European countries have printed negative prints on GDP, right? And some of the emerging markets look like they're in some trouble here. That's the sort of thing that can wash on U.S. shores here, right?
JOHN WILLIAMS: Absolutely. And that is why we again emphasized in our statement that we're monitoring this very carefully. And some of the issues in Europe are really around particular issues around auto production, around some regulatory changes and things. So we look at the data very, very carefully. But I agree there's been a somewhat slower outlook for global growth, we've incorporated that in our own assessments. And obviously looking at that as being a concern for a potential risk to --
STEVE LIESMAN: How about trade, John? How do you incorporate what's going with the trade wars between the U.S. and China and around the world? Is that a positive for growth? Is it a negative for--
JOHN WILLIAMS: This is where I think talking to business people and people in the markets is very helpful because they're dealing with this. And when you talk to people who are affected by tariffs or other issues, you really kind of see how it affects them. And clearly for some sectors of our economy this has been a negative and others maybe a positive. Overall so far we haven't seen you know, big direct effects of the tariffs but I do think there's a tone of uncertainty in the business community. And the tone of uncertain in the markets that we're hearing about is concerns, "Well, what happens if this gets worse? What does that mean for the economy?" And that is one of the risks to economic growth and potentially a risk upside to inflation.
STEVE LIESMAN: Could additional tariffs by the U.S. on China keep the Federal Reserve from hiking next year?
JOHN WILLIAMS: Well, you know, I'm going to answer this question I think how I answer any question like that. We take all this information together, take the pieces, put it together, we discuss it, try to get our best view of where the outlook is, where the risks are and then come to a judgment about policy.
STEVE LIESMAN: So let me bring up a topic you want to talk about, which is the President's comments on the Federal Reserve. There's some speculation out there, I think the "Wall Street Journal" editorial page speculated about this, that it was the President's comments that in part pushed you guys to raise rates on Wednesday.
JOHN WILLIAMS: That's -- I totally disagree with that viewpoint. First of all, as you know, I've been in the Federal Reserve nearly a quarter century. We are the – we are as non-political, non-partisan group of people you can get together in Washington, D.C. We are focused on the data, the analysis, coming to the best decisions we can. You know, the idea that we might raise rates three or four times is an idea that has been out there for a long. The data this year has been strong. Growth has been strong, job growth as I said has been really strong this year, and inflation has moved close to our 2% goal. I think in the context of those economic developments, having our rate hike decision a recent meeting was fully justified and completely made sense. It has nothing to do with outside commentary, whether we should or should not do that. I assure you at the Federal Reserve we get a lot of opinions expressed from a lot of different groups about what we should be doing and we hear those opinions but honestly we're focused on how to best achieve our goal. We want a strong economy.
STEVE LIESMAN: Would you prefer the President not be making comments on the Fed and what it ought to do with interest rates?
JOHN WILLIAMS: You know, I'm not going to opine on who should or should not speak about this because to me it's – you know, we're so focused on doing our jobs and doing what we think is best for the American people.
STEVE LIESMAN: You're in a very special position here at the New York Federal Reserve Bank, because one of the things you do is monitor markets and you have this critical markets desk there. Walk me through how you react when you see things like the Dow plunging 500 points in the wake of the Federal Reserve raising interest rates. Do you hit the -- your head with your palm and say, "We messed up"? How do you react to that?
JOHN WILLIAMS: No, I don't do that. I mean I think that obviously we have an amazing team of people who not only track financial markets carefully but we're talking to people on a daily basis and asking people "Hey, what's going on?" And you know, I and my colleagues are in regular contact with market participants to try to understand the thinking, the psychology if you will of market reactions. I also think that this is you know, a reminder to me and I think my colleagues that communication is just really important for us. We need to be --
STEVE LIESMAN: My colleague Jim Cramer believes you're not listening to business, that if you were listening to business and following business you A) would not have hiked this past Wednesday and would have really brought down your outlook for interest rates and probably economic growth next year.
JOHN WILLIAMS: Well, you know, we did have a very, very good discussion around all the information we are hearing, including the market changes. We did adjust our path for where we saw economic growth and inflation over the next few years. We did do obviously a significant shift in our view of the policy path going forward over the next few years. So I think that we did change our views. I want to clarify something. I mean, you say as you and others have noted we only lowered our forecast for growth by 0.2 for 2019 but that's in the context of a much shallower path for the Federal Funds Rate. So I think that the right context is we see a change in the economic outlook. We then adjust the path for policy and that somewhat offsets what was the tidying of financial conditions and some the global slowdowns. So I think what we're doing is exactly what we should be doing is we're changing our views in the economy as the information comes in and we're changing our outlook for policy to do our best to offset the changes in the outlook.
STEVE LIESMAN: John, you've been very generous with your time and there's not even a bit of perspiration on your forehead. I'm fairly impressed by that. I do have this question for you, though. Do you think the Fed needs to get to – well, I should give background -- nobody has done more academic work on the concept of neutral than you, and probably nobody's research papers are more cited than yours on this, so if there's an expert on neutral it's you, if it's possible to be expert on this uncertain concept. Does the Federal Reserve need to get to neutral? And should do it so next year and what is neutral in your mind?
JOHN WILLIAMS: Well, as Chairman Powell said and it's absolutely right, we're now basically at the bottom end of the range of neutral interest rates in terms of you know, our best estimates. There's a lot uncertainty about that. Honestly, despite having spent much of my life focused on the neutral rate, I think we should focus much more on where is the economy going? How do we get policy to achieve our goals? We want a strong economy, we want this expansion to continue on a sustainable basis, we want inflation near 2%. Neutral rate is part of that. I think the bigger part is really taking all the other information into account to get to the right decisions.
STEVE LIESMAN: Federal Reserve Bank President John Williams, a half an hour Christmas time chat, maybe it will be a tradition. Thanks for joining us.
JOHN WILLIAMS: Happy holidays.
STEVE LIESMAN: Happy holidays to you. Carl, David, back to you Sara.
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