Fed’s Williams Sees Sequence of Steps to Raise Rates to Neutral

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Federal Reserve Bank of New York President John Williams said officials should raise interest rates to more normal levels to curb inflation, while monitoring the economy's progress as they proceed.

“Clearly, we need to get something more like normal or neutral, whatever that means,” he told an audience in Princeton, New Jersey on Saturday after delivering a speech. “Do we need to get there immediately? No. We can do this in a sequence of steps.”

Fed officials this month announced a quarter-point increase in the target range for their benchmark federal funds rate, to 0.25-0.5%, and published projections showing the median policy maker expected to lift rates to 1.9% by the end of the year and 2.8% at the end of 2023. The median forecast for the neutral rate, a theoretical level that neither speeds up nor slows down the economy, is 2.4%.

“There's no question that that's the direction that we're moving, to get back to neutral,” he said. “Exactly how quickly we do that will depend on the circumstances that we're facing. And I do think we have to be cognizant of watching the economy and how it evolves during this whole path, and adjust as needed.”

Officials have pivoted to tackling the highest inflation in 40 years even as U.S. unemployment falls to near pre-pandemic lows, with the jobless rate in March declining to 3.6%.

Investors and forecasters increasingly expect that Fed officials will elect to raise rates in half-percentage point increments at upcoming policy meetings starting next month, instead of the more common quarter-point moves.

The New York Fed chief didn't mention the size of future increases that he favored.

“Uncertainty about the economic outlook remains extraordinarily high, and risks to the inflation outlook are particularly acute,” Williams said in his speech. “Our monetary policy actions, combined with those of other countries, will help bring demand for labor and products in closer alignment with available supply.”

The consumer price index soared 7.9% in February, the most since 1982. The Fed's 2% inflation target is based on a separate gauge, the personal consumption expenditures price index, which rose 6.4% in the 12 months through February.

Price Pressures

“I anticipate inflation readings will begin to decline later this year, although this process will take time to fully play out,” Williams said. “For 2022 as a whole, I expect PCE inflation to be around 4%, then decline to about 2.5% in 2023, before returning close to our 2% longer-run goal in 2024.”

Williams, echoing Chair Jerome Powell, also reiterated that the Fed could soon start allowing its holdings of Treasuries and mortgage-backed securities to roll off.

“I expect that this process of reducing the size of the balance sheet can begin as soon as the May FOMC meeting, he said, referring to the May 3-4 gathering of the Federal Open Market Committee.

While acknowledging that the Fed faces a challenge in lowering inflation without hurting the economy, Williams voiced confidence in the Fed's ability to use its policy tools to pull it off.

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