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2 min read . Updated: 15 Apr 2022, 12:10 AM IST The New York Fed president expressed doubt that rate increases would send the economy into a recession or cause pain
Federal Reserve Bank of New York President John Williams said a large interest-rate increase is a good prospect at the central bank’s early May meeting, as part of an effort to move short-term rates up aggressively to contend with high inflation.
A half-percentage-point increase at the May 3-4 rate-setting Federal Open Market Committee meeting is “a very reasonable option," Mr. Williams said Thursday on Bloomberg Television.
While noting no decision has been made yet, Mr. Williams said the central bank’s short-term interest-rate target range is “very low" in an environment of high inflation. “From a monetary policy point of view, it does make sense for us to move expeditiously towards more normal levels of the federal-funds rate, and also did move forward on our balance-sheet reduction plans," said Mr. Williams, who is also vice chairman of the FOMC.
The central bank official weighed in amid broadening expectations that the U.S. central bank will need to move rates up aggressively as it seeks to bring inflation down to its 2% target. U.S. inflation reached a four-decade high of 8.5% in March from the same month a year ago, according to the latest Labor Department data.
In recent days, a number of Mr. Williams’s Fed colleagues have expressed openness to one or more half-percentage-point rate increases, which would differ from the Fed’s typical pattern of raising rates in quarter-percentage-point increments.
Mr. Williams said he wasn’t ready to say that inflation had peaked, but it soon could. He said he sees signs that consumers are starting to shift buying patterns back toward how they were before the pandemic, which could suggest some relief on price pressures.
Mr. Williams also said he was confident rate rises could tame excessive demand in the economy in part because some of what has driven inflation up, like car loans and purchases of long-lasting goods, are categories that respond well to changes in interest rates.
Mr. Williams expressed doubt that Fed rate hikes would send the economy into a recession or cause pain.
In an economy with strong momentum, “we have a very unique situation with the demand for labor, obviously, much stronger than the supply," Mr. Williams said. Fed policy will aim to reduce excessive demand, he said, which means “I don’t think we have to decrease employment or raise unemployment so much—it’s just take the froth, if you will, out of the economy and get in on a more sustainable basis."
Mr. Williams also said he still believes that a federal-funds target rate that neither stimulates or restricts growth is around between 2% and 2.5%, in comparison to the current setting of between 0.25% and 0.5%.
Over the course of raising rates, Mr. Williams said the Fed may need to go “a little bit above" the neutral funds rate as part of the effort to cool inflation. “I think the economy can withstand" those sorts of short-term rates and continue to grow, he said.