Princeton, NJ, April 3 (BNA): New York Fed President John Williams said the Fed needs to move monetary policy toward a more neutral stance, but the pace of credit tightening will depend on the response of the economy.
Williams, responding to questions at a symposium about whether the Fed needs to speed up a return to a neutral policy rate that discourages or discourages spending, noted that in 2019 with rates set near neutral, “economic expansion has begun to slow,” And the Federal Reserve resorted to cutting interest rates, according to Reuters.
“We need to get close to neutral, but we need to keep an eye on the whole road,” Williams said. “There is no doubt that this is the direction we are moving in. Exactly how quickly we do it depends on the circumstances.”
Williams’ remarks suggesting a more cautious approach to upcoming rate hikes has prompted colleagues who feel the Fed should race toward a more neutral stance using larger-than-usual half-point rate hikes in upcoming meetings.
Policymakers’ average estimate of the neutral rate is 2.4%, which is the level traders currently feel the central bank will hit by the end of this year. Such a pace would require half-point increases at two of the Fed’s six remaining meetings this year, with one expected to debut at the Fed’s May 3-4 session.
The Federal Reserve raised interest rates last month by a quarter of a percentage point, beginning what policymakers expect will be “continuous increases” aimed at taming inflation that triples the Fed’s 2% target.
At the last Fed meeting, the median policymaker expected only quarter-point increases at each meeting, but many have since said they are ready to move more aggressively if necessary.
The outcome depends on whether inflation eases, Williams said.
“We expect inflation to come down but if it doesn’t…we’ll have to respond. Now I hope it doesn’t,” Williams said.
The Fed will also use a second tool to tighten credit as it begins reducing the size of its roughly $9 trillion balance sheet. That could start as soon as possible in May, Williams said.
In prepared remarks to the Princeton University symposium, Williams said high inflation is currently the Federal Reserve’s “biggest challenge,” likely driven by the war in Ukraine, the ongoing pandemic, labor shortages, and persistent supply in the United States.
“Uncertainty about the economic outlook remains extraordinarily high and risks to inflation expectations are particularly acute,” Williams said.
However, he said he expects the combination of price increases and balance sheet cuts to help ease inflation to around 4% this year, and “close to our long-term target of 2% in 2024” while keeping the economy on track.
“These measures should enable us to manage the proverbial downturn in a way that maintains a strong economy and labor market,” Williams said. “Both are well positioned to withstand tighter monetary policy.”