NEW YORK (Reuters) - The Federal Reserve is listening to the concerns of markets and open to changing its policy views next year, one its most influential members said on Friday, even while he stood by plans for interest-rate hikes and further paring of the Fed’s bond portfolio.
The somewhat soothing words from New York Fed President John Williams came two days after the U.S. central bank raised rates and delivered a confident assessment of the U.S. economy that, on Wall Street and around the world, was met with a broad market selloff.
Since October, when signs emerged that global growth is slowing, financial markets have grown increasingly sceptical that the Fed can continue tightening much longer. Williams, while sounding more conciliatory especially on plans to shed assets, did not commit to a more dovish monetary policy.
“Importantly, we are listening that there are some risks to that outlook. There are clearly some concerns that the economy will slow further,” he said on CNBC. “We are not sitting there thinking we actually know for sure what is going to happen.”
The comments sent the benchmark 10-year Treasury yield and dollar to session highs, while the S&P 500 briefly climbed as much as 1.5 percent. The moves were short-lived, however, with stock indexes weighed down by concerns over a looming U.S. government shutdown.
“He came across as a more soothing and empathetic voice than (Fed Chairman Jerome) Powell,” said Karim Basta, chief economist at III Capital Management.
The Fed on Wednesday raised rates a notch and slightly downgraded median expectations to two more rises in 2019, and one more in 2020. The selloff began in force when Powell told reporters there was no plan to stop the “autopilot” trimming $50 billion per month from the Fed’s swollen balance sheet.
Williams, a close ally of Powell and vice chair of the Fed’s policy-making committee, said he did “not at this point” believe that plan should change given a “very strong” economic outlook. But “we will go into the new year with eyes wide open, willing to read the data and listen to what we are hearing, re-assess our economic outlook, and take the right policy decisions,” he said.
The central bank bought some $3.5 trillion in bonds to help spur recovery from the 2007-2009 recession and it began letting them run off in October last year. Williams noted that the Fed has long said the plan would be adjusted if there were a “material deterioration” in the economic outlook.
Roberto Perli, a partner at Cornerstone Macro, said just “knowing the Fed is open to reconsidering it is important because it shows the Fed is not deaf, is not on autopilot, and will do what’s appropriate based on reality, not on abstract forecasts.”
The U.S. economy has outperformed peers this year, growing at a brisk 3.4 percent rate in the third quarter, thanks in part to big tax cuts and government spending that should begin to fade in 2019.
While the Fed is emboldened by a hot labour market, investors are fretting about tighter financial conditions that may foreshadow a downturn. A gauge of high-yield bond performance was trading close to its lowest since early 2016 on Friday, a day after the riskiest U.S. corporate bonds suffered their biggest daily drop in nearly three years.
Williams said he expects “somewhat slower but still very strong” growth next year with “very solid” job gains, and added the Fed is “listening to not only markets but everybody that we talk to.” He also predicted two rate hikes next year “in the context of a really strong economy moving forward.”
Futures traders on the other hand see at a maximum one hike in 2019, and a good probability of rate cuts in 2020. No other Fed officials are scheduled to speak publicly until early next year.
Reporting by Jonathan Spicer; editing by Chizu Nomiyama