Fed’s Williams says US economy does not yet justify policy shift

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A senior Federal Reserve official said the US economy was not yet ready for the central bank to start pulling back its hefty monetary support, even though the outlook has become rosier.

The comments from John Williams, the president of the Federal Reserve Bank of New York, were delivered on Monday amid high sensitivity in financial markets to Fed policy. Economic projections by central bank officials last week signalled they expect to increase interest rates in 2023, a year earlier than previously indicated.

European equities rose and stock markets across Asia-Pacific rallied on Tuesday morning following a rebound on Wall Street as investors were reassured by signals that the Federal Reserve would continue to support the economic recovery from the coronavirus pandemic.

Williams said the economy was “getting better all the time”, in some of his most bullish remarks since the pandemic started. But he insisted the Fed would stick to the terms of its monetary policy framework, introduced last August, which sets a high bar for tightening policy.

“It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good,” he said.

“But the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance of strong support for the economic recovery.”

The comments came ahead of Jay Powell’s scheduled testimony in Congress on Tuesday. In the Fed chair’s prepared remarks, released late on Monday, Powell pointed to “sustained improvement” in the economy but highlighted the “uneven” pace of the recovery in the labour market and lingering risks from the pandemic, including the slowdown in the rate of US vaccinations.

The Fed chair added that “inflation is expected to drop back toward our longer-run goal”, reiterating his view that the current surge in consumer prices will be transitory.

Both Powell’s prepared testimony and Williams’ remarks suggest the top brass at the Fed are more cautious on the prospect of a quick policy change compared to those of some of the other regional bank presidents who have made comments after last week’s FOMC meeting.

Speaking to CNBC on Friday, James Bullard, the president of the St Louis Fed, suggested the central bank might be ready to increase interest rates as early as next year, sparking a sharp sell-off in US stocks.

Williams told an event hosted by the Midsize Bank Coalition of America that interest rates would not be raised until full employment was reached and inflation had risen to 2 per cent and was “on track” to exceed that target moderately for some time.

He also said that any tapering of the Fed’s $120bn monthly asset purchases would not take place until “substantial further progress” had been made on those fronts.

And later, in response to questions from reporters after the event, he said there were both upside and downside risks to employment and the Fed’s inflation 2 per cent target. “It’s still a very uncertain outlook and we have to take that into account in how we think about policy decisions going forward,” he said.

On Monday, at an event hosted by Official Monetary and Financial Institutions Forum, a think-tank, Bullard reiterated the need for the Fed to begin considering scaling back its bond purchases in the face of higher inflation. 

Robert Kaplan, Dallas Fed chair, struck a similar tone at the same event.

“It would be healthier as we are making progress in weathering the pandemic and achieving our goals to start adjusting these purchases — Treasuries and mortgage-backed securities — sooner rather than later,” Kaplan said.

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