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James Hyerczyk
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The major U.S. equity indexes are mounting a strong comeback into the last hour of cash market trading after getting a boost from dovish comments by New York Federal Reserve President John Williams. Speaking at the annual meeting of the Central Bank Research Association, Williams said central bankers need to act quickly and forcefully when rates are low and economic growth is slowing.

In his speech, the prominent Fed policymaker delivered a speech discussing what should be done when central banks are near the “zero lower bound (ZLB),” or close to as low as rates can go.

“It’s better to take preventative measures than to wait for disaster to unfold,” he said. He further added rather than keep rates elevated to give central banks room to cut in the face of a crisis, the proper move is not to “keep your powder dry.”

“When the ZLB is nowhere in view, one can afford to move slowly and take a ‘wait and see’ approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB,” he said in prepared remarks. “In that case, you want to do the opposite, and vaccinate against further ills. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”

Williams didn’t actually say he would vote for a rate cut, but the response by stock market investors indicates that his dovish tone means he’s leaning that way. It could also mean to some that the Fed may take the aggressive route and raise rates by a half-a-point.

Currently, the markets are pricing in a 100% chance of a 25-basis point rate cut, and a 38% probability that the Fed might cut by 50-basis points, according to the CME.

Williams finished by saying that when faced with low rates and slowing growth, the best strategy is to “take swift action” and “keep interest rates lower for longer.”

“The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise,” he said.

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