“I think it’s a reasonable option for us because the federal funds rate is very low,” New York Federal Reserve Chairman John Williams said in an interview with Bloomberg Television on Thursday. “We need to bring politics back to more neutral levels.”
His remarks helped stoke a sharp rise in 10-year Treasury yields to 2.80% after the interview, from around 2.70% previously.
The New York Fed chief’s comments are the latest to highlight the U.S. central bank’s plans to bring rates back to pre-pandemic levels, if not higher. Along with the quarter-point move they made last month, that involves tightening about 200 basis points in the Fed’s six remaining meetings this year to bring rates to about 2.5. %.
This message was clearly heard by investors. Interest rate futures are almost fully priced for a half-point hike at the May 3-4 Fed meeting, when officials could also announce a start date to start cutting their balance sheet of nearly $9 trillion.
Williams expressed confidence in the Fed’s ability to make a soft landing on the economy — calming price pressures without forcing a sharp rise in unemployment — and said the Fed’s forward-looking communications about its policy plans have already kicked off the ball.
“We have seen dramatic and significant movement in yields and financial conditions over the past few months and this already positions policy well to restore the balance between supply and demand,” he said.
U.S. consumer prices rose 8.5% in March from a year earlier, marking the biggest increase since 1981. War in Ukraine has pushed up food and energy costs , moving headline inflation away from the Fed’s 2% target.
US central bankers, by their own admission, have been slow to respond and are now seen as acting with determination to catch up.
“Generous fiscal policies, supply chain disruptions and accommodative monetary policy have pushed inflation far higher than I’m comfortable with — and my colleagues at the FOMC — are comfortable with” said Fed Bank of Philadelphia President Patrick Harker during a speech at Rider University in Lawrence. Township, New Jersey, adding that he fears inflation expectations are getting “off the hook”.
But the consensus among policymakers is starting to crumble on how far beyond what they deem to be a “neutral” level for interest rates they should hit, if at all.
Fed doves argue that they don’t have to commit to anything more than bringing rates back to neutral until they have seen how the economy responds to the tightening already anticipated in financial markets.
They also point to shrinking balance sheets as another factor cooling the economy. Minutes from their March meeting showed officials backing a plan to cut it by $95 billion a month. In a question-and-answer session after his speech, Harker said the stocktaking would be done “methodically” and the process would begin “soon”.
Fed Governor Lael Brainard, who is awaiting Senate confirmation to become vice chairman, said the combination of higher rates and a smaller balance sheet will reduce inflation to 2% over time. She also cited changes in market expectations as evidence that the Fed’s forward guidance has already tightened financial conditions.
“As for exactly the right pace of this round of policy rate increases from meeting to meeting, I don’t really want to focus on that,” she said Tuesday.
“By moving quickly to a more neutral stance, it gives the committee a two-way option,” Brainard added, introducing an element of two-way risk to rates in case the economy starts to stutter.
Some economists worry that the Fed could tip the economy into recession by raising rates too much.
“It is now clear that they will rise by 50 basis points in May,” said Thomas Costerg, senior US economist at Pictet Wealth Management. basis points.”
But hawks like St. Louis’ James Bullard want to get rates above 3% this year and call it wishful thinking to suggest inflation will come down without hitting the political brake hard.
Fed Governor Christopher Waller, who was formerly head of research at Bullard in St. Louis before joining the Fed’s board in Washington in 2020, said the economy could handle increases in half a point in May and possibly in June and July as well.
“I don’t see any value in trying to shock the markets; we’re not in a Volcker-type moment,” he told CNBC in an interview on Wednesday. “We’ll do whatever it takes to bring inflation down, but we can do it in an orderly way without causing a lot of stress in the financial markets. .”
Cleveland Fed Chair Loretta Mester at an event hosted by the University of Akron on Thursday also expressed confidence that the central bank can successfully rein in inflation without derailing the economy. economy.
“Our intention is to reduce accommodation at the pace needed to better balance demand with limited supply to keep inflation in check while supporting expanding economic activity and healthy labor markets,” Mester said.
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