In a speech delivered yesterday, New York Fed President John Williams said he viewed the pre-2008 crisis era as “the world before” and the period after that as “the world after”. Inflation was a “major concerns” in the pre-2008 era. But now “inflation that’s too low is now a more pressing problem.” The experience of a slow recovery and persistently low inflation is a symptom of deeper problems afflicting advanced economies.
Two changes have taken place in “shifts in demographics and productivity growth” that fundamentally altered the economic environment. And that “translate directly into slower trend economic growth”. Also, “an abundance of savings, and a decline in demand for savings resulting from slower trend growth, together lead to lower interest rates”. Combined, they have contributed to “dramatic declines” in the longer-term neutral rate of interest, or r-star.
On the economy, he said “my baseline is a very good one” with GDP growth at above-trend 2.25% to 2.50%. Though, tailwinds from last year’s tax cuts are fading. Headwinds from trade tensions are rising. He added the yield curve inversion is a “pretty strong signal” of “perception that rates are going to be lower”. But he did’t take that as “an oracle”.
His full speech “If We Fail to Prepare, We Prepare to Fail“.
