Fed's Williams Says Fed Needs More Rate Rises To Cool Inflation

Federal Reserve Bank of New York President John Williams said on Thursday the U.S. central bank has more rate hikes ahead and sees signs inflationary pressures might be starting to cool off from torrid levels.

"With inflation still high and indications of continued supply-demand imbalances, it is clear that monetary policy still has more work to do to bring inflation down to our 2% goal on a sustained basis," Williams said in the text of a speech to be delivered before the Fixed Income Analysts Society in New York.

"Bringing inflation down is likely to require a period of below-trend growth and some softening of labor market conditions," Williams warned. He added that "restoring price stability is essential to achieving maximum employment and stable prices over the longer term, and it is critical that we stay the course until the job is done."

Williams, who also serves as vice-chairman of the Federal Open Market Committee (FOMC), did not specify in his prepared remarks what size rate increase he would like to see at the next FOMC meeting, scheduled for Jan. 31-Feb. 1. But he did not push back on market expectations that the Fed will lift rates by a quarter percentage point then.

A number of other Federal Reserve officials have expressed support for a downshift in the pace of rate rises.

Last year, the Fed moved its short-term interest rate target higher at a historically aggressive pace in a bid to fight the highest inflation seen in decades. It moved from a near zero federal funds rate in March to between 4.25% and 4.5% by year's end. A number of those increases happened in super-sized 75 basis point increments.

At the December meeting, officials penciled in a 5.1% stopping point for rate hikes this year and increased their target rate by half a percentage point at that gathering. Now, with inflation pressures starting to wane and uncertainty surrounding how far the Fed will need to go, a number of policy makers have offered support in recent days for a 25-basis-point hike at the upcoming FOMC meeting.

In his speech, Williams said some economic trends are moving the way the Fed would like. He said inflation should cool to 3% this year and will return to the 2% target in the next few years. He said high inflation is his main concern for 2023.

Williams expects growth to moderate to 1% this year and said "robust hiring, low unemployment, and strong nominal wage growth mean the labor market remains remarkably tight." Against the current 3.5% jobless rate, Williams sees unemployment ticking up to 4.5% over the course of the year, and described the current job market as "remarkably tight."