Federal Reserve Bank of New York President John Williams told The Wall Street Journal in an interview Tuesday that he doesn't see much evidence the Federal Reserve's bond buying stimulus is creating excessive risks in financial markets, adding that the once unorthodox tool is providing needed support for the U.S. economic recovery. Mr. Williams also gave his assessment of financial conditions and central bank policy and wealth inequality, and discussed a complicated inflation outlook. He also weighed in on the outlook for a Fed digital dollar. Here is a transcript of the interview, lightly edited for clarity.
MICHAEL S. DERBY: We covered a lot of ground [Monday in an appearance] talking about your outlook. You talked about some of the best levels, expectations of some of the best levels of growth since the 1980s. The possibility of 7% GDP growth this year, a pretty good outlook. So I wanted to know in light of that, where the risks are in the outlook. What is your balance of risks? And where are your ongoing pockets of uncertainty as you look out over the year?
JOHN WILLIAMS: Clearly, there are still a lot of uncertainties around the economic outlook. We've had extraordinary fiscal policy actions here and in other countries. The path of the virus is still uncertain with, you know, the various strains developing around the world. And the path of vaccinations both here and in other countries. And so it's unclear. I mean, there's a lot of positive progress there, but still a lot of uncertainty about how that will progress over the next year or so. So I think that those are the kind of the drivers of the economy over the last year, both the virus and the vaccines on the one hand, and then fiscal policy are, you know, I think some of the big drivers going forward, and areas with predictable uncertainty about that.
When I think in the global outlook, that's where I guess I have the greater focus on some of the downside risks. You can expect a lot of uncertainty from the events in India and South America and other parts of the world where the virus has continued to spread and with the terrible human consequences in terms of a health crisis. So those are some of the areas that I would say I'm particularly focused on in terms of some of the risks.
On the upside, I think, the fiscal actions have definitely put a lot of money in people's bank accounts, and that's been commented on a lot. And we -- you know, we don't have a lot of experience with that much -- you know, such large transfers to the household sector and to small businesses and how quickly will that money be spent as the economy reopens. So there's definitely upside possibilities for the economic outlook. And just I think in this case we have to continue to analyze, study, watch the data carefully and be ready to kind of adjust our understanding of what's happening in the economy as time moves forward.
I think the last thing I'll just add -- because I think this is, like, the most important theme of all -- is that we're in an extraordinary period of supply and demand -- both supply and demand moving very quickly. You know, reopening of an economy means that the supply side is reopening. It also means the demand side of the economy is reopening, people buying things and being willing to travel and go out and do things they had been not doing for the last year. And so I think that that's creating its own dynamic. In certain parts of the economy, the demand side is outpacing the ability of the economy to supply that in the short run. And we see that in, I think, housing construction and some of the commodity prices and some of the other bottlenecks we're seeing in the economy.
At the same time, I do think as the economy opens up -- and we're all looking forward to that -- the supply side will open up, too. You know, restaurants will reopen or staff fully, and airlines, hotels, everything like that will open up, too. So I think it's just going to be a particularly unique time in terms of supply and demand racing ahead. And I think in the end we're going to get to a full, strong recovery, and that's what's important. But the dynamics of this are going to be very interesting, too.
MR. DERBY: So the pace of vaccination in the U.S. seems to have gone better than people expected, but the rest of the world seems to be behind the United States and seems to be struggling in various ways, either from just straight up not having access to vaccines or not enough vaccines. If the rest of the world is way behind the U.S. and is struggling to get the pandemic under control in their parts of the world, how much of a headwind does that create for the U. S.?
MR. WILLIAMS: Well, I think it is a really important factor that, you know, other countries, it's going to take longer for them to get their population vaccinated, and so I think it affects our economy in multiple ways. One is the demand for our goods and services, the things that we sell abroad, is, I think, going to take longer for that demand to recover. Also our economy really does, you know, have a significant tourism sector. People come to the U.S. for that. Until the rest of the world is more fully past the pandemic, I think tourism's going to take longer to get back and a lot of other -- business travel and things like that that are parts of, you know, our economy will take longer to get back. So those are some of the direct economic effects.
I also think it just means that -- looking at the global economy with many countries struggling to get their economies back to their full potential, that means that there are global disinflationary pressures continuing. You know, we talk a lot about inflation in the U.S. regarding how the U.S. economy is doing, but of course, we're affected by inflationary pressures from around the world in terms of import prices and competition from abroad for the goods and services that we buy. And so I see that one of the headwinds, if you will, on the U.S. economy from the weakness abroad is really disinflationary or downward pressure on U.S. inflation, despite the fact that the U.S. economy is, you know, doing quite well.
One thing I would say is that I think Europe, even though their vaccination programs are behind where we are and a few other countries are, that's improving pretty quickly. To me, that's a bit of positive news that we're seeing in continental Europe, that they seem to be getting vaccinations moving ahead. And they're behind where we are, but hopefully they'll get to, you know, a much fuller vaccination of the public later this year. So I think that is somewhat of a positive. I do think, again, some of the areas -- in India, in South America, other parts of the world -- that's going to be much more challenging.
MR. DERBY: So you mentioned earlier supply and demand bottlenecks. And, you know, we've seen things like the microchip shortage, which seems to be a really significant issue. I believe one of the large auto makers said their second-quarter production will be down by like 50% simply because they can't get microchips to build the cars that everybody wants. So, obviously, this is unknown territory. We haven't really gone through anything like this in decades, if at all. You talk about global disinflationary forces, but there's been anecdotal evidence of crazy used-car prices from people just trying to get any kind of vehicle no matter, an old beater or whatever. How much of an upward bias to inflation do these supply and demand imbalances create? And I understand that you probably can't put any timeframe for how this is going to play out, but if you can't get used cars, if computers are hard to get, that's going to push prices up, it would seem.
MR. WILLIAMS: Sure. And, you know, I think that's definitely true. It's happening already. We're seeing it in some commodity prices. You know, everyone talks about lumber prices, and if you've paid for lumber lately like I have you've experienced that.
The question is how -- is how quickly is supply able to catch up with demand. And also -- and that will take some time, and it'll be different in different industries. The microchip example you gave I think is a very important one, but there are other commodities that, you know, demand has risen really much more quickly than I think most people expected and this could take a little time for supply to catch up.
I think another dynamic to this is that as the service sector reopens, what we're going to see is, I think, demand shifting kind of back from goods into services again. I mean, one of the things that we saw in the data and we definitely have experienced in our own lives is that when we all had to cut back on our expenditures on travel and recreation or entertainment and things like that, we tended to buy other things and maybe, you know, like you said, maybe buy a car because you live in a place where you need a car or something like that. So we saw that shift during the pandemic from services into goods, and that's put a lot of pressure on demand for a lot of these goods. I think as the economy opens up on the service-sector side, people will be shifting their dollars back into that area of the economy, where there's a lot of capacity to expand.
So definitely there's a kind of a tug of war here in terms of supply and demand, and also where the demand is, and we just have to watch that very carefully. And I think from my point of view what's important is to understand what are the kind of dynamics of the reopening of the economy and have that shifting, you know, maybe demand and supply around in ways that causes relative prices to move up and down versus signs of a more persistent or sustained underlying rise in inflation that would, obviously, be more concerning in terms of the longer or the medium-term outlook for inflation. So that just, you know, have to analyze the data very carefully, understand how these developments are playing out, and to what extent they're ending up more persistent than we thought.
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05-05-21 0544ET
