• New York Fed chief says policy ‘most restrictive in 25 years’
  • Inflation, spending data show economy shifting into lower gear

Federal Reserve Bank of New York President John Williams reiterated the Fed’s benchmark lending rate is at or near its peak level and said monetary policy is “quite restrictive.”

Rates are “estimated to be the most restrictive in 25 years,” Williams said on Thursday at the Bretton Woods Committee conference at the New York Fed. “I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis.”

Fed officials are expected to leave interest rates steady when they meet next month, giving themselves more time to evaluate the economy after raising rates aggressively from near zero in March 2022 to above 5% in July.

At the same time, bond traders have been ramping up their bets on an abrupt end to the central bank’s tightening cycle, and are mostly pricing in the first interest-rate cut by May.

Speaking to reporters after his speech, Williams said he’s “not losing too much sleep over” market forecasts, adding that rate cuts will depend on how inflation and the economy evolve.

Williams said he expects inflation to continue to move down to the central bank’s 2% goal, forecasting that the Fed’s preferred price gauge will fall to just above 2% next year and close in on that target in 2025. Government figures out Thursday showed that gauge — the personal consumption expenditures price index — slipped to 3% in October.

“We’ve gotten to a restrictive stance and things are moving in the right direction,” Williams told reporters. “Now we can assess whether we need to do more.”

That said, the New York Fed president said should price pressures prove more persistent than he expects, “additional policy firming may be needed.” Like his colleagues, Williams emphasized the need to continue to monitor incoming data to assess whether the current stance of policy is sufficiently restrictive.

Losing Steam

So far, incoming data for the fourth quarter suggests a broader cooling in economic activity. Data released Thursday showed US consumers dialed back their spending in October from the prior month as inflation continued to cool. Inflation-adjusted personal spending rose 0.2% last month after a downwardly revised 0.3% advance in September, according to the Bureau of Economic Analysis.

The report also showed the core PCE price index, which strips out the volatile food and energy components, rose 0.2% last month. From a year ago, the Fed’s preferred gauge of underlying inflation advanced 3.5%, the lowest reading since 2021.

Williams told reporters that he expects economic growth to be below-trend but “quite positive” next year. Economists generally see trend-like growth as around 2%.

The monetary authority is also in the process of shrinking its behemoth balance sheet — known as quantitative tightening, which Williams acknowledged is working as designed. Williams said there’s still quite a ways to go until bank reserve balances have shrunk to a point where they are still considered ample and don’t require central bank intervention, though that level is hard to predict.

San Francisco President Mary Daly echoed other policymakers who have made the case for keeping rates on hold in an interview published Thursday with Germany’s Börsen-Zeitung newspaper, noting interest rates are in a “very good place” to control inflation.

Written by:  @Bloomberg.com

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