New York Fed signals more rate hikes as inflation stays above target

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NY Fed signals more hikes

Highlights

New York Fed President Williams signaled additional interest rate increases likely as inflation remains above the 2% target despite a strong economy.
Markets expect the Fed to raise its current 3.75% to 4% federal funds target range by 25 basis points in December, with a possible 50-basis-point move due to stronger October core inflation of 0.3%.
Fed officials remain divided on the pace of tightening, with Williams warning that monetary policy can only curb future inflation and cannot reverse past price level increases.

Policy path points to further tightening

As reported by Reuters, Williams says additional interest rate increases are likely as the U.S. central bank responds to persistent inflation in an otherwise strong economy. He does not say when the Fed may raise rates again or how far the increases may ultimately go.

Speaking at the UC Berkeley Alumni Salon in New York, Williams says the economy is strong, the labor market continues to strengthen, and inflation remains persistent. He says the Fed will need to take actions over time to ensure inflation returns to its 2% goal in a timely and sustained way, adding that policymakers still have work to do to get monetary policy to the right place.

Markets broadly expect the Fed to lift its current 3.75% to 4% federal funds target range by a quarter percentage point at the next Federal Open Market Committee meeting in early December, followed by another increase in January. The policy debate has intensified after this week's stronger-than-expected inflation data, with core inflation rising 0.3% in October, a pace that Fed Governor Christopher Waller earlier says could put a 50-basis-point move on the table for December.

Inflation burden and limits of Fed action

Other officials, including Cleveland Fed President Beth Hammack, argue for a steadier and more modest pace of increases to give the economy time to adjust to higher short-term borrowing costs. That split highlights the challenge facing the central bank as it tries to curb price pressures without causing unnecessary damage to economic activity.

Williams also addresses the higher cost of living created by the inflation surge of recent years, saying there is little the central bank can do to lower the overall price level. He says monetary policy can influence the rate of change in prices rather than reverse past increases, and warns that attempts to push prices back down historically create major distortions and damage to the economy.

He says central banks over recent decades have chosen to keep inflation low rather than try to undo the economic effects of shocks such as war or a pandemic. The result, he says, is that households still face the consequences of a higher cost of living even as the Fed focuses on preventing inflation from becoming entrenched.

As noted in our earlier article, the S&P 500 drop reflected inflation-driven risk-off sentiment and tech-sector weakness.

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