Fed’s Williams sees rates rise to around 4.5% to lower prices

(Bloomberg) — President John Williams of the Federal Reserve Bank of New York said interest rates should rise to about 4.5% over time, but the pace and eventual peak of the tightening campaign will depend on how the economy performs.

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“The timing of that and how high we should raise interest rates depends on the data,” Williams said Friday during a moderated discussion hosted by SUNY Buffalo in western New York. “Right now, the focus is on bringing inflation back to 2% in a way that allows the economy to grow.”

Williams is vice chair of the rate-setting Federal Open Market Committee and a key member of Chairman Jerome Powell’s leadership team. His comments follow a string of aggressive comments from other policymakers who have bolstered bets they will continue their aggressive tightening campaign to curb the highest inflation rate in nearly 40 years.

Fed officials are raising interest rates at the fastest pace since the 1980s as they aim to halt the highest inflation in a generation. Policymakers are expected to raise their benchmark rates by 75 basis points in early November for a fourth meeting in a row after Friday, showing that the unemployment rate has unexpectedly bounced back to an all-time low of 3.5%.

That would put the Fed’s main interest rate in a range of 3.75% to 4%. Median projections from Fed officials show that they expect interest rates to rise to 4.4% by the end of this year and to 4.6% in 2023. The Federal Reserve hopes that higher borrowing costs will reduce spending and reduce demand for workers, fueling the growth of prices and wages.

Officials say they will include a range of economic data at their next meeting on Nov. 1-2, including an update on consumer prices coming next week. Williams said officials will be mindful of what happens to the global economy.

Williams said that interest rates are still low by historical standards and that the central bank needs to bring its benchmark rate to “somewhere around 4.5%” over time so that it stops pushing spending, rather than restricting it. .

The swift action of the Fed, which has raised interest rates by three percentage points since March, has rocked global financial markets and caused the dollar to appreciate against other currencies.

Williams acknowledged that the Fed’s actions had international implications and said he was in touch with his counterparts at foreign central banks, who also face high inflation. But he stressed that the Fed’s focus was on its domestic goal of restoring price stability.

“We are all just working to make the decisions to bring the economy back into balance,” he said.

The New York Fed chief said he sees economic growth in the US slowing but expects it to remain positive next year. He expects the labor market to weaken and unemployment to rise in response to higher rates.

“But most importantly, I see inflation falling significantly next year,” he said. “I see us on the right track, the economy is slowing slightly and at the same time inflation is going down in the coming years.”

(Updates with more comments from Williams from the second paragraph)

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