New York Fed President John Williams on Thursday sounded content with the current level of interest rates, but said he will be watching data closely to make sure the level of rates is high enough to keep inflation moving down.
“We’ve done a lot,” Williams said during a discussion at a conference sponsored by Bloomberg News.
“Right now, we’ve gotten monetary policy in a very good place. It is having the desired effects. Going forward, we will have to keep watching the data…and asking ourselves the question ‘is this sufficiently restrictive, do we need to maybe raise rates again?'” he said.
Williams’ comments were similar to Fed Chair Jerome Powell’s message at Jackson Hole, Wyo., late last month. The New York Fed president is a close ally of Powell.
Traders in derivative markets and most Wall Street economists think the Fed will move to the sidelines and keep rates at a range of 5.25%-5.5% at their upcoming meeting on Sept. 19 and 20, and await more data before deciding what to do next.
Some economists think the Fed is done raising rates. Others point to one more rate hike in either November or December. A smaller number worry that inflation could reignite in coming months, forcing the Fed to raise rates to near 6% or higher.
Fed officials have said the economy needs to cool in coming quarters to bring inflation down.
One of the risks for the Fed is that the economy continues to reaccelerate. The Atlanta Fed’s GDPNow measure suggests growth could top 5% in the third quarter.
“I think we have to be careful not to overreact to shorter-term developments,” Williams said. “But it is definitely one of the risks I see out there.”
Williams said there are special factors that give him confidence that inflation will keep cooling.
First of all, he argued that surveys show that American households don’t expect high inflation in the future. Fed economists think that inflation will stay high if the public expects prices to continue to rise.
In addition, Williams cited New York Fed research that he said estimates the underlying inflation trend is around a 2.5% rate.
He said this is not “the traditional inflation cycle,” where job losses have to rise to bring inflation down.
“All that talk about ‘we’re about to have a recession’ has vanished,” Williams said.
The New York Fed president said he expects the unemployment rate to move up above 4% in the coming months from its current 3.8% rate. But that is not the damage done in past cycles.
Williams shied away from discussing the looming strike by auto workers.
Williams again stressed the Fed was not thinking of changing its 2% annual inflation target.
Stocks DJIA SPX finished mixed on Thursday while the 10-year Treasury yield BX:TMUBMUSD10Y slipped to 4.25%.
