By Michael S. Derby 

NEW YORK -- Federal Reserve Bank of New York President John Williams said that in a world where interest rates are lower than they have been historically, central banks must confront any sign of weakness quickly and aggressively.

"Take swift action when faced with adverse economic conditions" and "keep interest rates lower for longer" when you do lower rates, Mr. Williams said at the 2019 Annual Meeting of the Central Bank Research Association, held at the New York Fed.

"Don't keep your powder dry -- that is, move more quickly to add monetary stimulus than you otherwise might," Mr. Williams said. When short-term interest rates are well above zero, it is then that "one can afford to move slowly and take a 'wait and see' approach to gain additional clarity about potentially adverse economic developments."

But with rates already relatively low, the Fed has less space to lower short-term borrowing costs. "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," he said.

Mr. Williams, who also serves as vice chairman of the rate-setting Federal Open Market Committee, didn't comment on the near-term U.S. economic and monetary policy outlook in remarks, which were largely academic in nature.

His speech discussed how central banks can navigate a world of persistently weak inflation and a lower level of interest-rates that are neutral in terms of their economic influence. That environment means that when trouble strikes, a central bank is likely to have less space to lower short-term rates before hitting near-zero levels, and an increased risk of having to resort to controversial and unconventional stimulus strategies.

Mr. Williams's observation that when central banks have limited maneuvering room, they must act aggressively, has implications for the current path of U.S. monetary policy. The Fed is widely expected to lower what is now a federal-funds target-rate range of 2.25% to 2.50% at the end of the month.

The Fed is expected to cut rates because even though the economy is doing pretty well, risks are rising from general business uncertainty and trade policy worries. At the same time, inflation around the world and in the U.S. remains weak. Fed officials had expected price pressures to rise this year, but instead, they still remain some distance below their 2% inflation target.

Fed officials have for the most part signaled they are going to lower rates at the end of the month. Markets expected a quarter-percentage-point easing, although some outside the Fed have said something bigger should happen to have a bigger impact on the economy. Minneapolis Fed leader Neel Kashkari has called for a half-percentage-point move down in short-term rates.

Mr. Williams noted that in terms of the current level of short-term rates, the Fed has enough interest-rate power to confront a "run-of-the-mill" economic shock, but he's less sure the same can be said of Japan and the European Central Bank. He also said it was worrisome that inflation is so tepid right now because the U.S. economy is "pretty strong" right now.

In a speech last week in Albany, Mr. Williams indicated he was ready to lower rates, but he offered few clues how aggressive he'd like to be. "Relative to earlier in the year, the conditions, the arguments for adding policy accommodation have strengthened over time," Mr. Williams said a week ago.

In his speech, Mr. Williams said low inflation is an issue seen around the world and likely is expected by systemic factors.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

July 18, 2019 15:51 ET (19:51 GMT)