WHEN: Today, Wednesday, December 18, 2019
WHERE: CNBC's "Squawk on the Street"
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, Wednesday, December 18th. Video of the interview will be available on CNBC.com later today. An article is currently available on CNBC.com: https://www.cnbc.com/2019/12/18/ny-feds-williams-says-it-would-take-a-material-change-in-economy-for-fed-to-adjust-stance.html.
All references must be sourced to CNBC.
MORGAN BRENNAN: Welcome back to "Squawk on the Street". Let's get over to Steve Liesman, live from the New York Federal Reserve, which is just a few blocks from here, alongside with a special guest. Steve?
STEVE LIESMAN: Morgan, thanks very much. Yeah, I am live inside the New York Federal Reserve with New York Fed President John Williams. Thanks for joining us, President Williams.
JOHN WILLIAMS: Well, welcome back to the New York Fed.
STEVE LIESMAN: Good to be here. End of December, end of 2019. It's a good time to talk about next year. Give me your thoughts on the outlook for 2020. What kind of growth do you expect? What kind of inflation? And what happens to the all-important Fed funds rate?
JOHN WILLIAMS: Right. And, you know, the economy has performed really well this year. We've had -- I expect to see growth at 2.25%. We have unemployment at 3.5%, near 50-year lows. And inflation has been a little softer than we would like to see. And I think looking at next year, I expect to see more of the same. Growth around 2% for the year. Unemployment staying hopefully around where it is now, around 3.5%. Unemployment rates, steady job gains and hoping to see inflation move back close to our 2% longer-run objective this year. So, I feel very good about where the economy has been this year, how it has progressed. And feel good about how it is going to look next year, very close to our maximum employment and price stability goals that we focus on at the FOMC.
STEVE LIESMAN: When you say the unemployment rate the unemployment rate should stick to -- you hope it sticks to 3.5%, do you mean you hope it doesn't go lower?
JOHN WILLIAMS: Well, no. I actually would say 3.5 is a very good place. You know, we haven't seen inflationary pressures really emerge, even with very low unemployment. If the unemployment rate moved down somewhat, I actually think that would be very good in terms of a strong labor market, probably help move inflation back up. I don't want to see unemployment move up a significant amount. But you know, right now, we have strong labor market, really solid job gains. And our job, I think at the FOMC, is to keep that economy strong and keep moving ahead in the way it is.
STEVE LIESMAN: Using various terms to describe where the Fed is right now. I've heard the idea of a firm hold with a high bar to cut and a high bar to hike. Could you explain how you think about where the Fed is right now and what it would take for the Fed to move again?
JOHN WILLIAMS: Steve, I'm going to use a word you might be surprised to hear me say and that's data dependency.
STEVE LIESMAN: That was sarcastic for anybody who hasn't – John, John, I should point out, John Williams several years ago as San Francisco Fed President had a T-shirt that said monetary policy is data dependent and gave it out to people.
JOHN WILLIAMS: Right. So—and it's still true. I think it's been true in 2019, as we saw the economic landscape shift and some of the risks around the economy shift. We obviously adjusted monetary policy this year, I think very effectively, to manage some of those risks and keep the economy strong. So, when I look to the year ahead, I think monetary policy is in a good place. I think we're well positioned to support growth, support inflation back to our 2% goal. But, as we've proven in the past if economic conditions shift, change in a material way or the outlook changes in a material way, obviously we're ready to adjust our policy views accordingly.
STEVE LIESMAN: Right. I mean, I get that and you know that I get that. So, the question becomes more of: how is it data dependent? Is it one where you have to see a significant shoot to the upside on inflation in order to raise rates? And maybe less of a shoot to the downside to lower them?
JOHN WILLIAMS: I don't see it that way. I think it's, you know, pretty balanced in terms of where monetary policy is. And I think with rate cuts that we did this year, I think we created a situation where monetary policy is accommodative, it is supporting growth and I think that that's a good position for given what's going on in the economy. In terms of what would cause of to change the current stance on policy, I think it would begin to be material change in the economic outlook. I can't point to one or two things in particular. I would point to this idea that maximum employment, price stability is really important. We want to see the labor market remain strong. We want -- I want to see the inflation rate moving back to our 2% goal on a sustained basis. So, those are the things I'm really focused on.
STEVE LIESMAN: You had said back in November you thought the risks were tilted to the downside. Is that still the case? You've had some improvement in some risks that you've had. For example, trade deals, looks like there will be a trade deal between the US/China. The USMCA looks like it's on the road. Brexit looks like it's more of a handle on it – has more of a handle on it. Are the risks diminished now?
JOHN WILLIAMS: Well, I think there's still some significant risks to the down side. I hear from business people around the district about concerns about uncertainty: uncertainty about trade, uncertainty about global events. So, even though we've seen, so for example in Brexit, we've seen the election and some perhaps reduction in uncertainty about what happens there, there's still the implementation of Brexit, uncertainty about exactly how that will play out. Obviously, there's geopolitical risks around the globe. And even though we've seen positive developments in terms of trade which I think does reduce uncertainty and those are positives in terms of what I hear from businesses. But there's still quite a bit of uncertainty around, you know, again, global geopolitical and trade issues. So, my view is that some of this uncertainty is going to likely be with us for the time being. Again, my outlook is very positive. I expect growth to be around 2% and unemployment to stay low. So--
STEVE LIESMAN: Last two policy questions. First, is it a policy of the Federal Reserve right now to allow inflation to overshoot for some period of time?
JOHN WILLIAMS: So, what I view the policy of the FOMC really is, is to make sure we achieve our 2% symmetrical. And that means, inflation, we want to be around 2%--of course, that means sometimes a little bit above, sometimes below—but really, on a consistent basis be at our 2% objective, depending on economic circumstances. Inflation might be a little soft relative to that. In another circumstance it might be higher. But really see this notion that we're on average 2% of inflation, sometimes a little above, sometimes below. And that's what I think the word symmetric means.
STEVE LIESMAN: The recent rate cuts that you described by the Chairman as insurance cuts. Back in 1998 when you took out insurance cuts, you took those cuts back. Are these the kind of cuts you need to take back if those risks that you were insuring against go away?
JOHN WILLIAMS: Well, I think that, you know, there are both kind of the risks and uncertainties we talked about. But those are also global economic developments. In the current circumstance, global growth has slowed. Some of those risks have actually turned into reality. We've seen downgrades to global growth from say, the IMF and others. And I think those are things that have shifted the landscape that we're operating under. So, I don't see those reversing any time soon. And, as I said, although we've seen some positive developments in terms of uncertainties, I still think there's quite a few uncertainties out there. So, I don't have any prediction about reversing or any other policy actions. Again, I think that where we've got monetary policy is in the right place: supportive of growth, supportive of achieving our goals.
STEVE LIESMAN: Another big area of concern of yours is the overnight lending market, the repo market. Do you feel confident now that after several moves by the New York Federal Reserve to inject liquidity and make liquidity available to the banking system and to the overnight lending market, is there enough liquidity to avoid some kind of crisis or rise of risk over the turn of the year?
JOHN WILLIAMS: Obviously, for the last several months the FOMC and Federal Reserve Bank of New York have made, I think, really important decisions to provide, to make sure there are ample reserves in the system. We've taken actions in terms of building up our reserve levels through the purchases of T-Bills and we're doing overnight in term repo operations that add reserves to the banking system. Those have been highly effective. We're seeing interest rates like the Federal Funds rate, our target rate, stay right in the range that the FOMC set. We're seeing money markets operate very smoothly. At the end of the year, typically at the end of the year, there are pressures to move certain repo rates and interest rates around for various reasons. I'm guessing that will happen this year as well. But from our position, we are, I think it is in a very good position in terms of providing liquidity, providing reserves to the system and importantly keeping the Federal Funds rate in the range throughout the year and also making sure markets are operating smoothly.
STEVE LIESMAN: John, we're almost out of time but I do have to ask you this discussion. There's still a lot of discussion what happened in September when there was a blow-out in the repo rate that caused concern throughout the markets. One idea that's come up, the Vice Chairman for Bank Supervision of the Fed has talked about this idea that it was regulations and supervision that may have caused banks to hold back. Where do you stand on that? Do you need to relax the rules that require banks to sort of reserve a certain amount and not make as much liquidity available to the repo system?
JOHN WILLIAMS: Well, here at the New York Fed one of the key responsibilities we have is carrying out monetary policy for the FOMC . We have the Desk, our group here, that's doing that. And so, what we -- in the direct response to what we saw in Mid-September in terms of the turmoil in the repo markets was to take very quickly analyze what's happening, provide liquidity, provide the reserves in the system and obviously develop a longer-term plan to create the ample reserves that we need there. So, what we've seen since then for the last few months is that interest rates are, you know, behaving themselves exactly as we would like to see in terms of the Federal funds rate. We're seeing market functioning return to what we saw before Mid-September. So, my view markets are functioning well with the ample reserves. There are a lot of events that happened in Mid-September. You know, right now, the markets are operating very well. Now, there are longer-term issues that clearly will be under study, not only in the Federal Reserve but elsewhere, to make sure that we understand all aspects of these markets and think through some of those issues. Right now, I'm focused on making sure that, you know, we're carrying out the monetary policy direction for the FOMC setting. And that's working very well.
STEVE LIESMAN: John Williams, President of the New York Fed. Thanks for joining us.
JOHN WILLIAMS: Happy holidays.
STEVE LIESMAN: Carl, back to you at the New York Stock Exchange.
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