Fed’s Williams: The economy is in a ‘pretty good place’

• The consumer has been very resilient, a  more severe slowdown in business investment could hit households.
• Eyes scrutinizing US data, US dollar walking a tight-rope.  

New York  Federal Reserve  Williams says recent rate cuts position policy to ‘appropriately’ address risks from trade uncertainty, global slowdown and low inflation.

Key comments:

• The economy is in a ‘pretty good place’ and policy will be set on a ‘meeting by meeting’ approach.
• Inflation is moving up a little bit but sees no real signs of inflation taking off.
• Consumer has been very resilient, boosted by positive income growth, job gains and asset prices.
• A more severe slowdown in business investment could hit households and slow consumer spending.
• Standing repo facility alone would not solve problem of low reserves.
• Adding reserves through temp repo operations doesn’t get liquidity moving in same way as having higher level of reserves.

FX implications:  

Despite William’s comments on the consumer, we have started to see some disappointments in the most recent consumer data which adds to a series of disappointments elsewhere in the economy, fuelling the likelihood of additional rate cuts from the Fed.  

“The Philly Fed business survey slipped to 5.6 in Oct from 12.0 in Sep but forward components were firmer. Sep housing starts were lower than expected (-9.4%m/m, est. -3.2%m/m), but Aug revised to +15.1%m/m from +12.1%m/m. Permits were also similarly revised and relatively firm (-2.7%m/m, est. -5.3%m/m, prior revised to +8.2%m/m from +7.6%m/m),” analysts at Westpac noted, adding, “markets are pricing 20bp of easing at the 31 October meeting and a terminal rate of 1.24% (vs 1.88% currently).” Moreover, Williams has pointed out earlier, (Federal Reserve’s John Williams: Will adjust plan for money markets ‘as appropriate’), that rates are low already – That is a dangerous cocktail for the US Dollar which is already walking a tight-rope.