Federal Reserve Bank of New York President John Williams said monetary policy is now tight enough to guide inflation back to the Fed’s target, but suggested policymakers need more evidence of cooling inflation before cutting interest rates.
“My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2% longer-run goal,” Williams said in prepared remarks Wednesday in White Plains, New York.
“I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis,” he said.
Williams said on Dec. 15 that the near-term question for Fed officials was whether policy was “sufficiently restrictive” to ensure inflation comes back to 2%, adding officials “aren’t really talking about rate cuts.” Since then, however, a number of other policymakers have expressed an openness to cutting interest rates if inflation continues to fall.
Policymakers are expected to leave interest rates steady when they meet this month, giving themselves more time to evaluate the economy after raising rates aggressively from near zero to above 5%. At the same time, bond traders are betting on an abrupt end to the central bank’s tightening cycle, though expectations of a March interest-rate cut have eased.
Data released last week showed the US job growth picked up in December and wage gains exceeded expectations. That labor market strength has fueled steady consumer spending and healthy economic growth despite high lending costs. Meanwhile, inflation has slowed, and consumer price data released Thursday is expected to show further softening.
In his latest speech, Williams also pushed back on Dallas Fed President Lorie Logan’s assertion that policymakers should begin discussing slowing its balance-sheet runoff, a process known as quantitative tightening. He said bank reserves are little changed from levels seen before the central bank embarked on QT.
“In its plans, the FOMC said that to ensure a smooth transition it intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves,” he said. “So far, we don’t seem to be close to that point.”
Minutes of the Fed’s December gathering showed several participants said it would be appropriate to begin discussing the guidance that would determine when the Fed starts tapering the unwind, sparking a wave of discussion among market participants as to when the central bank will begin pulling back.
This article was provided by Bloomberg News.