John Williams, Chief Executive Officer of the Federal Reserve Bank of New York, speaks at an event in New York, U.S. November 6, 2019. REUTERS/Carlo Allegri/File Photo
PRINCETON, NJ, April 2 – The Federal Reserve needs to move monetary policy toward a more neutral stance, but the pace at which it tightens lending will depend on how the economy responds, the New York Fed said President John Williams on Saturday.
Responding to questions at a symposium about whether the Fed needs to accelerate its return to a neutral policy rate that neither encourages nor discourages spending, Williams noted that in 2019, with interest rates near neutral levels, “economic expansion began to slow.” . and the Fed cut interest rates.
“We have to get closer to neutrality, but we have to watch all the way,” Williams said. “There is no question in which direction we are moving. How quickly we do that depends on the circumstances.”
Williams’ comments suggest a more cautious approach to upcoming rate hikes than has been called for by peers, who believe the Fed should steer towards a more neutral stance by making bigger-than-usual half-point hikes at forthcoming meetings.
Policymakers’ average estimate of the neutral interest rate is 2.4%, a level that traders currently believe the central bank will reach by the end of this year. Such a pace would require a half-point hike at two of the Fed’s remaining six meetings this year, with a first appearance expected at the May 3-4 Fed meeting.
The Fed raised interest rates by a quarter of a point last month, the start of what policymakers expect to be “sustained hikes” aimed at taming inflation, which currently stands at three times the Fed’s 2% target.
At the last Fed meeting, the median policymaker only forecast a quarter-point hike at each meeting, but since then several have said they are prepared to be more aggressive if needed.
The outcome depends on whether inflation eases, Williams said.
“We expect inflation to come down, but when it doesn’t we need to react. My hope right now is that that won’t happen,” Williams said.
The Fed will also use a second tool to tighten lending as it begins reducing the size of its nearly $9 trillion balance sheet. Williams said this could start as early as May.
In prepared remarks to a Princeton University symposium, Williams said high inflation is the Fed’s “biggest challenge” right now, and it may be fueled by the war in Ukraine, the ongoing pandemic and ongoing labor and supply shortages in the United States driven up.
“Uncertainty about the economic outlook remains extraordinarily high and risks to the inflation outlook are particularly acute,” Williams said.
But he said he expects the combination of rate hikes and balance sheet shrinking will help bring inflation down to around 4% this year and “close to our longer-term target of 2% in 2024” while the economy stays on track remains.
“These measures should allow us to navigate the proverbial soft landing in a way that maintains a sustainably strong economy and labor market,” Williams said. “Both are well positioned to withstand tighter monetary policy.”
Reporting by Howard Schneider; Editing by Diane Craft