By Michael S. Derby
NEW YORK (Reuters) – New York Federal Reserve President John Williams on Friday pushed back on surging market expectations of interest rate cuts, saying the U.S. central bank is still focused on whether it has monetary policy on the right path to continue bringing inflation back to its 2% target.
“We aren’t really talking about rate cuts right now,” Williams said in an interview with CNBC. When it comes to the question of lowering rates, “I just think it’s just premature to be even thinking about that” at this point, he said.
Williams was the first Fed official to weigh in following the central bank’s decision on Wednesday to hold its benchmark overnight interest rate unchanged in the 5.25%-5.50% range. The Fed also signaled that the current policy rate is very likely the peak of an aggressive cycle of increases aimed at bringing high levels of inflation back to the central bank’s 2% target.
Fed policymakers also penciled in 75 basis points of rate cuts in their forecasts for next year, a projection linked to the expectation that inflation pressures will continue to abate. That pivot helped spark a sharp rally in stock and bond markets.
Fed Chair Jerome Powell said at his press conference following the end of the two-day policy meeting that the central bank would raise rates again if it deemed such a move necessary. But he added, “the question of when will it become appropriate to begin dialing back the amount of policy restraint in place, that begins to come into view, and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today.”
Ahead of Williams’ television appearance on Friday, futures markets were eyeing the Fed’s March 2024 policy meeting as the likely point when the central bank will start lowering rates.
The rally in markets following this week’s policy meeting has caused a broad easing in financial conditions that could complicate the Fed’s mission, as the central bank still believes it has work to do to ensure inflation continues its retreat back to the target. Williams noted that overall financial conditions are still tighter, reflecting how monetary policy has shifted.
He also reiterated his view that monetary policy is at or near the peak, and said that in terms of the economy, “the base case is looking pretty good: Inflation is coming down, the economy remains strong and unemployment is low.”
Williams cautioned that a move higher in interest rates still can’t be ruled out. “One thing we’ve learned, even over the past year, is that the data can move in surprising ways,” he said, adding “we need to be ready to move further if inflation, the progress of inflation were to stall or reverse.”
In the interview, Williams also said he’s not ready to say when the Fed can stop its balance sheet reductions, which have complemented the rate hiking cycle. But he did say financial sector liquidity remains robust, signaling there’s still some distance to go with that process.
(Reporting by Michael S. Derby; Editing by Paul Simao)
