U.S. Federal Reserve Chair Jerome Powell’s signal that the central bank plans to raise interest rates by 50 basis points at each of its next two policy meeting is sensible, New York Fed President John Williams said on Tuesday, as he underscored the challenging environment in which policymakers seek to tame inflation. The central bank last week raised its benchmark overnight lending rate by half a percentage point to a target range between 0.75% and 1%, and has since signaled similar-sized hikes are likely at its next two policy meetings in June and July.
“I do think as a base case of thinking, 50 basis point increases makes sense exactly as Chair Powell laid out,” Williams told reporters following a speech to an economics conference organized by Germany’s central bank in Eltville am Rhein, Germany. “We are removing accommodation pretty quickly…and that gives us a little space to move in something like the 50 basis point increment at the next couple of meetings.”
Fed policymakers are battling inflation at a 40-year high and have pivoted to a more aggressive stance as price pressures, once seen as transitory, have persisted even as the worst of the COVID pandemic passed and the economy reopened.
“The ongoing pandemic and war in Ukraine bring a tremendous amount of complexity and uncertainty…We will need to be data dependent and adjust our policy actions as circumstances warrant,” Williams said as he described the task as difficult but not insurmountable.
Russia’s recent invasion of Ukraine has driven up food and energy prices and more lockdowns in China to tamp down COVID cases have also exacerbated existing supply chain problems as the Fed aims to bring inflation down to its 2% goal without derailing the economy.
A good outcome for the central bank, Williams added, would be one in which the labor market stayed broadly strong and healthy as inflation came down, even though the unemployment rate would rise.
“When I think of a soft landing, it’s really a matter of, yes we could see growth below trend for a while and we definitely could see unemployment moving up somewhat but not in a huge way… I think that’s the challenge.”
The New York Fed chief said he sees a key inflation gauge, the core personal consumption expenditures price index, at almost 4% at the end of this year, down from 5.2% today, before falling to around 2.5% in 2023. A U.S. government report on Wednesday is expected to show consumer price inflation slowed slightly in April, which would be a welcome sign that inflation has peaked. Williams also said he expected the factors causing supply chain issues to begin to resolve themselves so that some of the central bank’s rebalancing would be achieved through increases in supply rather than aggressive rate moves.
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