- Size of Sept. 21 Rate Hike Will Depend on ‘Totality of The Data’
- Funds Rate Likely Needs To Go Above 3.5% Next Year
- Throws Cold Water On Talk Of 2023 Rate Cuts
By Steven K. Beckner
(MaceNews) – New York Federal Reserve Bank President John Williams said Tuesday that short-term interest rates are “quite a ways” from where they need to be if the Fed is to bring inflation down to its 2% target, and he virtually scoffed at the notion that the Fed would be able to reduce rates next year.
Williams said the Fed needs to get real rates above longer run “neutral” to a “somewhat restrictive” level to reduce demand relative to supply and thereby curb inflation. He indicated that would mean a federal funds rate somewhere in excess of 3.5%
Williams, vice chairman of the Fed’s policymaking Federal Open Market Committee and a top lieutenant of Chairman Jerome Powell, gave no clear signal about how much the FOMC will raise the federal funds rate at its next meeting Sept. 20-21 meeting.
But he suggested the size of the Sept. 21 rate hike is less important than the path of the funds rate for the remainder of this year and next as he spoke to participants in an online event hosted by the Wall Street Journal.
Williams’ comments come just a few days after Powell shook financial markets with a more strongly worded commitment to reducing inflation, whatever the cost.
In a keynote address to the Kansas City Fed’s annual Jackson Hole symposium Friday, Powell vowed to move monetary policy into a “restrictive” posture and keep it there “until the job is done.”
Countering speculation that the Fed will soon moderate the pace of interest rate hikes and perhaps cut them next year, Powell declared, “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
This may involve economic “pain,” warned Powell. “Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.”
Williams, who has typically not sounded as hawkish as some in the Fed’s campaign against inflation, declined to predict whether the FOMC will raise the funds rate by 75 basis points for a third straight meeting on Sept. 21 or whether it will raise it by 50 basis points.
He said the 75 basis point rate hikes at the June and July meetings “made complete sense,” because, “We had a strong labor market (and) inflation was far too high.” So there was “the need to get interest rates higher to get slow demand and make it more in line with available supply.”
Since the July 26-27 meeting, Williams noted that there have been “encouraging” signs on inflation, while the labor market remains “very strong.”
As for the appropriate size of the Sept. 21 rate hike, he said, “We will be weighing all the information we have and coming to a decision about what the right setting of policy is …. . It’s really the totality of all the data.”
Williams said the FOMC will have to think about “not just one meeting … but where do we want to see interest rates by the end of the year and then next year.”
“If, based on the data, it’s clear that we need to get rates significantly higher by the end of the year, then obviously that informs the decision at any given meeting,” he added.
But Williams put more emphasis on the appropriate path of rates over the course of a series of FOMC meetings than on the size of the rate hike on Sept. 21. “In terms of the costs and benefits, I think it’s really about getting monetary policy in the right place…making sure that we’re creating conditions so that demand is more in line with supply.”
“We always have the opportunity at following meeting to adjust the policy actions as well,” he went on. “So it’s not like you make one decision once and for all… but the path of policy.”
The size of the Sept. 21 rate hike “will really depend on how strong the labor market is, what we’re seeing with inflation, making that decision and then thinking about what we do next time and the time after that,” he added.
Asked about the FOMC’s “destination” or “terminal rate,” Williams reiterated that “it depends on the data.,” but said, “I do think that, with demand far exceeding supply, we do need to get real interest rates – that’s the interest rate adjusted for inflation – above zero.”
“We need to have a somewhat restrictive policy to slow demand, and we’re not there yet,” he continued. “So if you think about next year if inflation is somewhere between 2 .5 and 3% – a forecast that I think is reasonable – you’re thinking about having interest rates that are well above that, because it’s the interest rates minus inflation rate that tells us where the real interest rate is.”
“So we’re still quite a ways from that, and to me that’s one of the benchmarks,” he went on. “We need to get the interest rate relative to where inflation is expected to be over the next year into a positive space, probably higher than the longer run neutral level, which I think is about a half percent on real rates.”
Elaborating, Williams said the appropriate level of the nominal funds rate must be evaluated in real terms relative to the longer run neutral rate, which the FOMC has estimated at 2.5%. That consists of the Fed’s 2% inflation target plus a 2% real rate, he noted.
“So the way I think about it … is basically where is the federal funds rate less the inflation rate that’s expected over the next year,” he said. “To me a real interest rate has to be forward looking in that way.”
Looking toward next year, he again said the eventual funds rate level will “depend on what happens to the data,” but if inflation is in a 2.5% to 3.0% range next year, he said a funds rate of at least 3.5% would be appropriate.
“You would have to consider what’s happening to inflation, what’s happening with the economy,” he said. “But I think my baseline kind of view would be that, yes, you do need to get somewhat above that (3.5%), because you’re trying to get not just to neutral in a real interest rate sense, but you’re trying to get demand in line with supply.”
The funds rate is currently in a 2.25% to 2.50% target range – approximately where the FOMC estimates “neutral” to be. There has been speculation that the FOMC might cut rates next year, but Williams threw cold water on that idea.
He said a time will come when the FOMC will be able to slow the pace of rate hikes, depending on how the inflation outlook evolves, but as things now look he said, “We’re going to need to have a restrictive policy for some time.”
“Based on what I’m seeing, it’s going to take some time before I see any adjustment of rates downward.”
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Contact this reporter: steve@macenews.com
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