Federal Reserve tools can manage current imbalances, NY Fed’s Williams says
The Federal Reserve’s monetary policy toolkit is well equipped to deal with imbalances durable goods and housing that have emerged, John Williams, president of the Federal Reserve Bank of New York, said Tuesday during a speech at the NABE/Bundesbank International Economic Symposium in Eltville am Rhein, Germany.
“Higher interest rates will cool demand in these rate-sensitive sectors to levels better aligned with supply,” he said. “It will also reduce the heat in the labor market, reducing the imbalance between job vacancies and the supply of available labour.”
So far, the US central bank’s Federal Open Market Committee has raised its benchmark rate by 75 basis points, implementing a 50 basis point hike at its meeting last week, bringing the target range for federal funds rate at 0.75%-1.00%. “I expect the FOMC to act quickly to bring the federal funds rate back to more normal levels this year,” he said. The Fed has already indicated that it expects further increases “if any.”
The Fed’s plan to shrink its balance sheet will also help achieve the central bank’s goals. But that will take time. “Balance sheet reduction will occur over the next few years, eventually bringing the Federal Reserve’s holdings of securities to a level consistent with the ample reserves framework that the FOMC reaffirmed in January when it issued its principles for reducing the balance sheet. record,” Williams said. mentioned.
Communications helped the Fed achieve its goals. Since disclosing its plans to raise rates and shrink its balance sheet, 2-year Treasury yields and 30-year fixed mortgage rates have risen more than 2 percentage points, he said. “We have also seen a significant tightening of financial conditions overseas,” he noted.
In addition to the Fed’s influence on the demand side of the equation, supply shortages would eventually need to be resolved, Williams said, “so that part of the rebalancing is done by increasing supply, both in the United States and around the world.”
For 2022, he expects personal consumption expenditure inflation to be near 4% before falling to around 2.5% next year.
However, getting the pace of the crunch right can be tricky. It’s “really hard” to tell where the neutral rate is, he said. The neutral point is the point at which interest rates do not increase or impede economic activity.
Earlier, the Fed’s semi-annual financial stability report flags ‘risk of a sudden and significant deterioration’