Pace of rate hikes depends on how economy responds By Reuters

©Reuters. FILE PHOTO: John Williams, CEO 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

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 will depend on how the economy reacts, New York Fed President John Williams said on Saturday. .

Williams, responding to questions at a symposium about whether the Fed needed to accelerate its return to a neutral policy rate that neither encourages nor discourages spending, noted that in 2019 with rates set near neutral “the economic expansion began to slow down.” and the Fed resorted to rate cuts.

“We need to get closer to neutral, but we have to watch all the way,” Williams said. “There’s no question that’s the direction we’re moving in. Exactly how quickly we move depends on the circumstances.”

Williams’ comments suggest a more cautious approach to upcoming rate hikes than has been pushed by colleagues who feel the Fed should rush to a more neutral stance by using larger-than-usual half-point rate hikes in the next meetings.

The median of policymakers’ estimates of the neutral 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 half-point hikes at 2 of the remaining six Fed meetings this year, with a first expected at the May 3-4 Fed session.

The Fed raised interest rates last month by a quarter of a percentage point, the start of what politicians hope will be “continuous increases” aimed at reining in inflation that is currently triple the Fed’s 2% target.

At the Fed’s last meeting, the median lawmaker projected quarter-point hikes at each meeting alone, but several have since said they were prepared to act more aggressively if necessary.

The outcome depends on whether inflation declines, Williams said.

“We expect inflation to come down, but if it doesn’t … we’re going to have to respond. My hope right now is that that doesn’t happen,” Williams said.

The Fed will also use a second tool to tighten credit as it begins to reduce the size of its nearly $9 trillion balance sheet. Williams said that could start in May.

In remarks prepared for a Princeton University symposium, Williams said high inflation was currently the Fed’s “biggest challenge” and was potentially being fueled by the war in Ukraine, the ongoing pandemic and ongoing labor shortages. labor and supplies in the United States.

“Uncertainty about the economic outlook remains extraordinarily high and risks to the inflation outlook are particularly acute,” Williams said.

However, he said he hoped the combination of rate hikes and balance sheet reduction would help ease inflation to around 4% this year and “close to our long-term target of 2% in 2024” while keeping the economy going. .

“These actions should allow us to manage the proverbial soft landing in a way that maintains a sustained and strong economy and job market,” Williams said. “Both are well positioned to withstand tighter monetary policy.”

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