Fed's Williams says slower U.S. growth is a 'new normal'

NEW YORK (Reuters) - Slower U.S. economic growth is not necessarily “cause for alarm” but a “new normal” people should expect, a top Federal Reserve official said on Wednesday, adding that he is not leaning one way or another on where rates should go.

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New York Fed President John Williams has slightly marked down forecasts for economic growth to around 2 percent as violent markets late last year constrain consumer and business spending now.

But Williams told the Economic Club of New York that the “as-good-as-it-gets” result would be right on target with the potential growth in the United States, lower than prior years because of slower gains in worker productivity and a declining workforce.

That justifies current interest rates, he said, which are at a “neutral” level that neither encourages nor discourages economic activity.

“I want to see wage growth higher; it’s a sign of a strong economy,” rather than a harbinger of troubling inflation, Williams told reporters.

The Fed is also partly responsible for the markets’ improvement in recent weeks and financial stability risks are in a normal range, he suggested.

“Part of that is the reassessment of monetary policy,” he said. “If we hadn’t shifted our communication around the likely path of interest rates I don’t think financial conditions would have responded as much as they have.”

Williams is a permanent voting member of the Fed’s rate-setting Federal Open Market Committee and leader of the regional bank charged with implementing that policy. The committee meets March 19-20 to chart future policies but markets have written out the chance that a rate hike would be in the cards anytime soon especially given the chance that weakening Chinese and European economies could spoil the world’s largest economy.

In fact, despite what Williams characterized as a relatively strong forecast, most questions for the central banker focused on how policymakers would deal with an unexpected pullback.

And Williams conceded that the Fed needs to consider the consequences of a central bank failing to meet its inflation target for an extended period, one subject of a longer-term policy review this year that may see the Fed welcome inflation that is slightly and temporarily over its target. No decisions have been made yet.

But Williams told reporters that even if the economy delivers strong performance a rate cut could be justified if inflation trends down in sustained fashion, which is not in his forecast. The policymaker told Reuters last month that he sees no need to raise rates again this year unless economic growth or inflation shifts to an unexpectedly higher gear.

Williams said that buying bonds and other assets would be on the table in a downbeat economic scenario that drove rates to zero again as would negative rates, though he suggested the second option may impose unacceptable costs.

The considerations are more than academic in this “new normal.” The European Central Bank, which just ended a historic 2.6 trillion-euro bond-buying program aimed at pushing down borrowing costs, is already contemplating new support measures, with the first possibly coming at its next policy meeting on Thursday.

The Fed, which used similarly unusual bond-buying tactics after the 2008 global financial crisis, has been letting those assets decline in an effort to return to normal. But a complete return to normal now seems unlikely anytime soon.

Fed Chair Jerome Powell said last month that the bond shrinkage would stop later this year. Williams on Wednesday declined to offer a specific timetable. A decision is coming soon, he said.

Reporting by Trevor Hunnicutt; Editing by Chizu Nomiyama