© Reuters. FILE PHOTO: 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
By Howard Schneider
PRINCETON, NJ (Reuters) – The Federal Reserve needs to shift monetary policy to a more neutral stance, but the pace of credit tightening will depend on the reaction of the economy, said New York Fed President John Williams. said on Saturday.
Williams, in response to questions at a symposium about whether the Fed needs to accelerate a return to policy neutrality levels that discourage or discourage spending, noted that in 2019 with interest rates are set near neutral, “economic expansion begins to slow”. and the Fed resorted to cutting rates.
“We need to get closer to neutral but we need to watch the whole way,” Williams said. “There’s no question about which direction we’re moving. Exactly how quickly we do that depends on the circumstances.”
Williams’ comments suggest a more cautious approach to the upcoming rate hike than spurred by colleagues, who feel the Fed should race to a more neutral stance using the rate hikes larger than the usual half a point in upcoming meetings.
Policymakers on average estimate a neutral rate of 2.4%, the level traders now feel the central bank will hit by the end of the year. Such a pace would require a half-point increase at two of the remaining six Fed meetings this year, with the first being expected at the Fed’s May 3-4 session.
The Fed raised interest rates last month by a quarter of a percentage point, the start of what policymakers expect is a “continuous increase” aimed at curbing inflation, which currently stands at three. times the Fed’s 2% target.
At the Fed’s last meeting, the average policymaker expected only a quarter point increase at each meeting, but some have since said they were ready to move more aggressively if needed.
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. My hope right now is that it won’t,” Williams said.
The Fed will also use a second tool to tighten credit as it begins to reduce the size of its balance sheet by nearly $9 trillion. Williams says that could start as soon as May.
In remarks prepared for the Princeton University symposium, Williams said high inflation is now the Fed’s “biggest challenge”, and is likely to be further fueled by the war in Ukraine, the pandemic and the pandemic. ongoing, and continuing, supply and labor shortages in the United States.
“Uncertainty about the economic outlook remains high, and the risks to the inflation outlook are particularly severe,” Williams said.
However, he said he expected the combination of interest rate hikes and balance sheet reduction to help bring inflation down to around 4% this year and “closer to our 2 percent long-term goal by next year.” 2024″ while keeping the economy on track.
“These actions will allow us to manage the soft landing in a way that maintains a sustainable strong economy and labor market,” Williams said. “Both are well positioned to withstand tighter monetary policy.”
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