The president of the New York Federal Reserve said it will be “appropriate” to raise the central bank’s benchmark short-term interest rate in March and begin to reduce its $9 trillion stockpile of bonds “later this year.”
“With today’s strong economy and inflation that is well above our 2% longer-
run goal, it is time to start the process of steadily moving the target range [for short-term interest rates ] back to more normal levels” John Williams said in a virtual speech Friday at New Jersey City University.
Williams is seen as a close ally of Fed Chairman Jerome Powell, who has been quiet lately as he awaits a Senate vote on his confirmation for a second term. The Fed’s next strategy-setting meeting is on March 15-16.
Williams did not tip his hand on whether he would prefer a quarter-point hike or 50 basis points, but most economists predict the Fed will start small. Another Fed president, Loretta Mester, was also noncomittal in a speech on Thursday.
The Fed cut its benchmark short-term rate to near zero early in the pandemic and doubled the size of its balance sheet to $9 trillion by buying U.S. Treasury bonds and securities composed of home mortgages. The goal was to drive down long-term rates.
Williams said the Fed should move to “steadily and predictably” reduce its bond holdings. He noted that long-term rates have already risen in anticipation of the emerging Fed strategy.
Williams predicted inflation, as measured by the Fed’s preferred PCE index, would fall to around 3% by the end of 2022 from the current yearly rate of just under 6%.
He said supply-chain bottlenecks that have contributed greatly to high inflation are likely to subside and help restore the balance between supply and demand.
The economy is likely to grow a shade less than 3% this year, he said.
“I am confident we will achieve a sustained, strong economy and inflation at our 2% longer-run goal,” he said.