A top official at the Federal Reserve said the US central bank should “steadily” raise interest rates from their current near-zero levels starting in March, in a bid to damp demand and bring down inflation.
The comments from John Williams, president of the Federal Reserve Bank of New York, on Friday come amid substantial uncertainty about how quickly the central bank will increase its main policy rate after “lift-off” expected in March.
As a member of Fed chair Jay Powell’s inner circle, Williams’ views carry significant weight as senior policymakers engage in a heated public debate about the lengths the Fed needs to go to counter inflation.
“With today’s strong economy and inflation that is well above our 2 per cent longer-run goal, it is time to start the process of steadily moving the target range back to more normal levels,” he said at an event hosted by New Jersey City University.
“In particular, I expect it will be appropriate to raise the target range at our upcoming meeting in March,” he added.
Williams is the latest Fed official to weigh in on the pace at which the central bank should be moving away from the ultra-stimulative monetary policy settings that have been in place for two years since the onset of the pandemic.
He told reporters that he does not see a compelling argument for a “big step” in March, but said the tightening process should occur faster than last time, when the Fed first adjusted in December 2015 and then waited a year to deliver a second quarter-point increase.
James Bullard, president of the St Louis Fed and voting member on the Federal Open Market Committee this year, has been one of the most vocal advocates for “front-loading” the interest rate increases. He has called for the federal funds rate to be 1 percentage point higher from its near-zero level by July.
Bullard has also previously signalled his support for a larger than usual half-point interest rate rise next month — although he said he would defer to Powell on the issue.
Several Fed officials have pushed back on the need for such a move, including Esther George of Kansas City and Loretta Mester of Cleveland. Mary Daly of San Francisco has instead called for a “measured” approach to lifting the fed funds rate to a level consistent with slower economic activity.
Market expectations for a half-point interest rate increase in March dropped substantially on Friday after Williams spoke, suggesting investors have revised their view on how aggressive the Fed will be.
Williams acknowledged that inflation, which has reached its fastest pace in four decades, was hovering at a level that was “far too high”, and said monetary policy had an “important role to play” in helping to tame it.
“Demand for goods and some services is now far outstripping supply, resulting in elevated inflation,” he said. “With the labour market already very strong, it’s important to restore the balance between supply and demand and bring inflation down.”
Divisions within the Fed are even sharper over the balance sheet, with some officials making the case for outright asset sales of agency mortgage-backed securities and others preferring a more methodical reduction by no longer reinvesting the proceeds of maturing securities. The Fed has not yet specified when the process will begin and how quickly they will proceed.
Williams said the Fed should “steadily and predictably” reduce its nearly $9tn balance sheet, and start scaling back its holding of Treasuries and agency mortgage-backed securities later this year.
“Taken together, these two sets of actions — steadily raising the target range for the federal funds rate and steadily bringing down our securities holdings — should help bring demand closer to supply,” he said.
Williams’ comments followed remarks from Charles Evans, president of the Chicago Fed, who said at an event hosted by the University of Chicago Booth School of Business on Friday that the current inflation situation warrants a “substantial repositioning of monetary policy”. But very restrictive interest rates may not be necessary, he added, translating to a “smaller risk” to jobs and growth.