By David Randall, Trevor Hunnicutt and Lewis Krauskopf
NEW YORK, July 19 (Reuters) - When New York Fed PresidentJohn Williams talked about the need to "vaccinate the economy"on Thursday, markets listened. And when the New York Fed itselfspoke up later to clarify his remarks, investors were again allears.
In fact, as the U.S. central bank nears what is expected tobe its first rate cut in a decade, global markets are hanging onto every clue about the upcoming decision to an unusual degree.Investors are trying to gauge whether policymakers are seriouslyworried about a sharp economic downturn or simply want to insureagainst that possibility.
One reason for investor confusion stands out. Fed ChairJerome Powell has set the table for an interest-rate cut but hasfailed to win consensus why one is needed. Policymakers inrecent weeks have sketched out rate-cut rationales ranging frombond market behavior to low inflation to the need to boostwages. Some have also suggested they do not see the need for arate cut in the first place, as Boston Fed President EricRosengren did on Friday
So when Williams, Powell's No. 2 at the policy-settingtable, appeared to provide some clarity, traders jumped on it.
U.S. stocks and bonds and futures contracts tied to theFed's policy rate rallied on Thursday, milliseconds afterremarks from Williams that appeared to suggest an appetite forforceful rate cuts. The benchmark S&P 500 on Fridayremained near the all-time high set earlier this week.
"It's better to take preventative measures than to wait fordisaster to unfold," Williams said at an academic conference onThursday. "Don't keep your powder dry."
Later in the day a New York Fed representative saidWilliams' comments were "not about potential policy actions" atits upcoming rate-setting meeting, but academic in nature.
In the speech, Williams cited years of his own research.Stretching back at least five years as a policymaker he hasrepeatedly used similar phrasing to describe how the Fed shouldbehave when interest rates are near zero.
But investors now are listening extremely closely.
Markets have long been expecting the Fed to cut rates at itsJuly 30-31 meeting. Williams' comments were read by some as notonly endorsing that view, but suggesting the need for a deep,50-basis-point cut.
Not even St. Louis Fed President James Bullard, the lone Fedpolicymaker who voted at the Fed's June meeting for a rate cut,has gone that far. On Friday Bullard again said he supports aquarter-point cut.
Futures market odds of a 50-basis-point cut at the Julymeeting soared to 71% late Thursday immediately after Williams'speech but fell to 23% on Friday, according to CME Group'sFedwatch Tool.
President Donald Trump, who has repeatedly castigated theFed for raising rates, also weighed in. "I like New York FedPresident John Williams first statement much better than hissecond," Trump tweeted Friday.
"His first statement is 100% correct in that the Fed'raised' far too fast & too early," Trump wrote as he againblamed the Fed's rate hikes for holding back economic growth.
Williams has not said the Fed raised rates too fast or tooearly, and his record of remarks and policy votes shows hesupported all of the central bank's nine rate increases since2015.
Fed policymakers, meanwhile, face the risk of disappointingmarkets if their communication is not pitch-perfect. Any selloffcould worsen financial conditions and increase the risk of a badoutcome for the economy.
The New York Fed did not comment on the market reaction orthe comments by Trump. Policymakers on Saturday enter atraditional "blackout" period before their upcoming meeting,during which they avoid making policy pronouncements of anykind.
"The Fed has been behind the curve for market pricing forabout eight or nine months and they can go a long way tocorrecting the inverted curve by cutting 50 basis points," saidGary Cloud, a portfolio manager of the Hennessy Equity andIncome Fund. The problem, he said, is if the Fed is seen as"kowtowing to pressure by the president or that they knowsomething negative about the direction of the economy that wedon't know."
Given that Williams is vice chair of the Federal Open MarketCommittee, "one can appreciate" why market expectations shiftedtoward a 50 basis point cut, Mike O’Rourke, chief marketstrategist at JonesTrading, wrote in a note, adding that it is"alarming" that the Fed is having trouble communicating withmarkets.
"It is not a big deal when markets are at all-time highs,but the rest of the time it matters a very great deal," O'Rourkesaid.
(Reporting by David Randall, Trevor Hunnicut and LewisKrauskopfAdditional reporting by Ann SaphirEditing by Alden Bentley and Leslie Adler)