© Reuters. FILE PHOTO: John Williams, chief executive officer of the Federal Reserve Bank of New York, speaks at an event in New York, US, Nov. 6, 2019. REUTERS/Carlo Allegri/File Photo
By Howard Schneider
PRINCETON, NJ (Reuters) – The Federal Reserve needs to move monetary policy toward a more neutral stance, but the pace at which credit tightens depends on how the economy responds, New York Fed President John Williams said on Saturday. .
Williams, in response to questions at a symposium about whether the Fed should expedite its return to a neutral policy rate that does not encourage or discourage spending, noted that in 2019, with rates close to neutral levels, “economic expansion started to slow down”. and the Fed resorted to rate cuts.
“We need to get closer to neutral, but we need to keep an eye on it all the way through,” Williams said. “There is no question in which direction we are going. Exactly how quickly we do that depends on the circumstances.”
Williams’ comments suggest a more cautious approach to upcoming rate hikes than has been pushed by colleagues who believe the Fed should race to a more neutral stance by using larger-than-usual half-point rate hikes at upcoming meetings.
The median policymaker of the neutral rate is 2.4%, a level that traders currently believe will be reached by the central bank by the end of this year. Such a pace would require a half-point increase at 2 of the Fed’s remaining six meetings this year, with the Fed expected to make its first presence during the May 3-4 session.
The Fed hiked interest rates by a quarter of a percentage point last month, the start of what policymakers expect to be “continuing hikes” intended to contain inflation that is currently at triple the Fed’s target of 2%.
At the last Fed meeting, the median policymaker only forecast a quarter-point rise at each meeting, but since then several parties have said they are willing to act more aggressively if necessary.
The outcome depends on whether inflation declines, Williams said.
“We expect inflation to fall, but if it doesn’t… we’ll have to react. I’m hoping at this point that it won’t,” Williams said.
The Fed will also use a second tool to tighten lending as it begins to shrink the size of its nearly $9 trillion balance sheet. Williams said that could start as early as May.
In prepared remarks at a symposium at Princeton University, Williams said high inflation is currently the Fed’s “biggest challenge”, and may be exacerbated by the war in Ukraine, the ongoing pandemic and ongoing shortages of labor and supplies in the United States. .
“Uncertainty over the economic outlook remains extremely high and risks to the inflation outlook are particularly acute,” Williams said.
However, he said he expected the combination of interest rate hikes and balance sheet reductions to help reduce inflation to about 4% this year, and “close to our longer-term goal of 2 percent by 2024,” while the economy remains on track.
“These actions should enable us to manage the proverbial soft landing in a way that maintains a sustainable strong economy and job market,” Williams said. “Both are well positioned to withstand tighter monetary policy.”
Fusion Media or anyone associated with Fusion Media assumes no liability for any loss or damage resulting from reliance on any information, including data, quotes, charts, and buy/sell signals on this website. Be fully informed about the risks and costs associated with trading the financial markets, it is one of the riskiest forms of investment possible.