John S. Williams, president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee (FMOC) for setting rates, said the central bank is getting closer to deciding whether to raise its short-term interest rates from near zero.
Williams said current signs of a strong labor market and rising inflation are major factors in determining when changes should be made.
“Given the clear signs of a very strong labor market, we are approaching the decision to begin this process,” Williams said of the increase in short-term borrowing costs.
Another combination of high demand for goods and supply bottlenecks has sent inflation to “significantly high” levels, he continued.
“The next step in reducing monetary adjustment to the economy will be to gradually return the target range for the federal funds rate from its current very low level to more normal levels,” Williams said at a virtual event hosted by the Council on Foreign Relations on Jan. 14.
“The circumstances we face today are unlike anything we have faced in the past,” referring to the pandemic.
A surge in the Omicron option could slow growth over the next few months and prolong the supply chain crisis, but “once the Omicron wave subsides, the economy should return to a sustainable growth path and these supply constraints in the economy should ease over time.” Williams said.
The central bank president said businesses could be hurt in the short term as many still struggle to find workers and consumers continue to avoid buying in person.
The job market is expected to improve this year as the US economy recovers, with growth at 3.5 percent and the unemployment rate down 0.4 percent from 3.9 percent, Williams predicts.
Williams declined to comment when the Fed would consider raising near-zero short-term interest rates, but said “the timing of such decisions will be based on careful consideration of a wide range of data and information with a clear view of the situation.” about our goals of maximum employment and price stability.”
The Fed is battling a prolonged surge in worse-than-expected inflation and moving its monetary policy into position to bring inflation closer to its 2 percent target.
Williams expressed confidence that the US economy will be able to cope with changes in the Fed’s planned policy.
He expects inflation to stabilize towards the end of the year as growth slows and supply issues are resolved, with inflation falling to 2.5% this year and approaching 2% in 2023.
Other Fed representatives during the week publicly stated the need to reduce the assistance of central banks to the economy.
San Francisco Fed President Mary Daly, at a separate event hosted by The New York Times, said officials “will have to adjust policy” as there is currently little sign that inflation, which has reached its highest level since June 1982, will be able to correct myself.
In the latest scheduled speeches by Fed policymakers ahead of the January 25-26 FMOC meeting, Federal Reserve Chairman Jerome Powell and Fed vice chairman candidate Lael Brainard stressed that high inflation needs to be brought back under control.
Fed officials are expected to discuss strategies to raise interest rates and reduce more than $8 trillion in bond holdings when they meet again in two weeks.
In December, the FOMC accelerated the pace of declining bond purchases with an eye to ending that stimulus in March.
The central bank may raise rates when it ends its bond-buying program in mid-March, Brainard said.
Other central bank officials said this week that a rate hike is expected in March, followed by a series of rate hikes throughout the year.
Most officials expect at least three rate hikes, but St. Louis Fed Chairman James Bullard said there could be four, and Fed Chairman Christopher Waller said as many as five increases could occur.
“The economy is in excellent shape in terms of where we are right now – in terms of employment and GDP – and it makes sense for monetary policy to evolve as the economy develops,” Williams concluded.
“We’re actually well positioned to do it in a way that’s not disruptive.”