By Howard Schneider
PRINCETON, N.J. (Reuters) -The Federal Reserve requires to move financial policy towards a more neutral position, however the speed at which it tightens up credit will depend upon how the economy responds, New York Fed President John Williams stated Saturday.
Williams, in reaction to concerns at a seminar about whether the Fed required to accelerate its go back to a neutral policy rate that neither motivates or prevents costs, kept in mind that in 2019 with rates set near the neutral level “the economic expansion started to slow,” and the Fed turned to rate cuts.
“We need to get closer to neutral but we need to watch the whole way,” Williams stated. “There is no question that is the direction we are moving. Exactly how quickly we do that depends on the circumstances.”
Williams’ remarks suggest a more cautious approach to coming rate increases than has been pushed by colleagues who feel the Fed should race towards a more neutral stance by using larger than usual half-point rate hikes at upcoming meetings.
The median policymaker estimate of the neutral rate is 2.4%, a level that traders currently feel the central bank will hit by the end of this year. Such a pace would require half point increases at 2 of the Fed’s remaining six meetings this year, with expectations of a first coming at the Fed’s May 3-4 session.
The Fed raised interest rates last month by a quarter of a percentage point, the beginning of what policymakers expect to be “continuous boosts” aimed to tame inflation currently running at triple the Fed’s 2% target.
At the last Fed meeting the median policymaker projected quarter-point increases only at each meeting, but several since then have said they were prepared to move more aggressively if needed.
The outcome depends on whether inflation eases, Williams said.
“We anticipate inflation to come down however if it does not….we will need to react. My hope today is that will not take place,” Williams stated.
The Fed will likewise be utilizing a 2nd tool to tighten up credit when it begins to decrease the size of its almost $9 trillion balance sheet. Williams stated that might start as quickly as May.
In ready remarks to a Princeton University seminar Williams stated high inflation was presently the Fed’s “greatest challenge,” and is possibly being driven greater by the war in Ukraine, the continuous pandemic, and continued labor and supply lacks in the United States.
“Uncertainty about the economic outlook remains extraordinarily high, and risks to the inflation outlook are particularly acute,” Williams stated.
However, he stated he anticipated the mix of rate boosts and balance sheet decrease to assist alleviate inflation to around 4% this year, and “close to our 2 percent longer-run goal in 2024” while keeping the economy on track.
“These actions should enable us to manage the proverbial soft landing in a way that maintains a sustained strong economy and labor market,” Williams stated. “Both are well positioned to withstand tighter monetary policy.”
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