The U.S. Federal Reserve is expected to start raising interest rates next month to help contain too-high inflation, New York Federal Reserve Chairman John Williams said Friday.
But he added that rate hikes may not have to start as strong as some have suggested.
With inflation at its highest level in two generations, the Fed is expected to seek to cool the economy by raising its benchmark short-term interest rate from its record low of near zero. , where he has been throughout the pandemic. The only question has been how deep and how fast will it be, as too aggressive an approach could stifle the economy while too cautious could let inflation soar further.
“I personally don’t see any compelling case for taking a big step early,” Williams said following an event at New Jersey City University to discuss the economy and interest rates.
Williams, who is vice-chairman of the committee that sets the Fed’s interest rate policy, said he saw a hike in March as the start of an “evolving” process to bring rates closer to interest to a level where they no longer stimulate the economy. . He also said he expects inflation to fall from its current level due to a confluence of factors including Fed actions and expected improvements in chain bottlenecks. supply. Inflation reached 7.5% in January compared to a year ago.
Williams’ comments were echoed by other Fed officials, who spoke at a policy conference in New York. This support for a steady approach to rate hikes contrasts with previous statements by Federal Reserve Bank of St Louis President James Bullard, who said the Fed should consider a half-point rate hike when one of its next meetings, double its normal increase. His comments rattled Wall Street, which expected a slower rate hike.
Federal Reserve board member Lael Brainard said she expects the Fed at its next meeting in March to “initiate a series of rate hikes.”
Brainard is close to Fed Chairman Jerome Powell and was named vice chairman, the Fed’s No. 2 job.
Krishna Guha, an analyst at investment bank Evercore ISI, said Brainard “largely agrees” with Wall Street’s expectations that the Fed would hike rates six times this year.
She also said the Fed would soon turn to shrinking its huge US$9 trillion balance sheet, which more than doubled during the pandemic due to Fed bond purchases. She said they would likely do that faster than between 2017 and 2019, when they let about $50 billion in bonds mature without replacing them.
Charles Evans, president of the Chicago Fed, said on Friday that the Fed needed to adjust its low interest rate policies, which he called “ill-intentioned.” But he also hinted that the central bank might not have to raise rates sharply this year.
Evans also said the high prices were primarily caused by supply chain disruptions and other factors resulting from the pandemic, and will likely subside in part on their own.
And given the current strength in the economy, Fed decisions are unlikely to slow hiring as much as interest rate hikes have in the past, Evans added.
Higher rates can contain inflation by slowing down the economy. But they can also cause a recession if they go too high, and they put downward pressure on all kinds of investments, from stock prices to cryptocurrencies.
Wall Street has recently been obsessed with almost every word of Fed officials, hoping to guess how quickly and how much the Fed will act.
The mix of aggressive and moderate comments left traders’ expectations in flux. According to CME Group, traders were only pricing in a 21% chance of such a half-point move on Friday afternoon, down from 49% a week earlier.
Williams said he didn’t want to go into great detail about whether market expectations are in line with his own thinking on interest rate policy.
But he said the broad moves made sense, based on expectations that the Fed would bring its key interest rate closer to normal, like 2% to 2.5% by the end of the month. next year. That’s more than the latest forecast from Fed officials. In December, they had a median projection of 1.6% for the federal funds rate at the end of 2023.
Evans, who generally favors lower interest rates, acknowledged that if inflation remains high throughout this year, more rate hikes may be needed.
Other speakers at the New York conference focused on whether the Fed got it wrong when it adopted its new policy framework in August 2020, which aimed to keep rates low until inflation actually materializes. Previously, the Fed typically raised borrowing costs when the economy was healthy to anticipate any inflation.
Frederick Mishkin, former Fed governor and economist at Columbia University, said the Fed had “made a big mistake” in not raising rates sooner to keep inflation from taking off. Now, Fed officials may have to raise rates much more to get prices level, he added.
Evans, however, defended the Fed’s new policy framework by pointing out that in the past, when the Fed raised rates to anticipate inflation, such moves likely cost many jobs. And in some cases inflation has not materialized.
Following remarks from Williams and Evans, the two-year Treasury fell to 1.46% from 1.49% on Thursday night. It tends to move with expectations regarding Fed rate policy. Stocks and other segments of the bond market also fell on fears of a possible Russian invasion of Ukraine.