It all depends on one factor…
The US economy is moving in the right direction, but the Federal Reserve won’t rush interest rate cuts, said New York Fed president John Williams. He sees potential cuts later this year if inflation data continues its downward trend.
“At some point, I think it will be appropriate to pull back on restrictive monetary policy, likely later this year,” Williams said in an interview. “But it’s really about reading that data and looking for consistent signs that inflation is not only coming down but is moving towards that 2% longer-run goal.”
While acknowledging the possibility of rate cuts this year, policymakers stress that the fight against inflation is far from over. Recent economic data, including strong job gains and persistently high inflation readings, have cooled expectations for rapid rate cuts.
Investors initially hoped for rate cuts as early as March. However, reports of robust job growth and stubbornly high inflation have shifted expectations. Most economists now expect the Fed’s preferred inflation gauge, due next week, to rise – potentially fueling arguments against early rate reductions.
Williams also addressed recent increases in auto and credit card delinquencies, suggesting they could slow down consumer spending this year.
Balance sheet management
The NY Fed chief also touched on the central bank’s balance sheet. He said officials will apply lessons learned in 2019, when scarce bank reserves briefly destabilized markets, to ensure a smoother process this time around.
“We’ve learned some of the lessons... we had set out to get to the minimum level of reserves consistent with efficient operations,” Williams said.
The focus is on maintaining a reserve buffer without risking scarcity. Williams said the Fed is looking at tools like the Standing Repo Facility to prevent market turbulence and is examining various indicators “through a different lens.”
“Interpreting these different indicators and some of the new ones we’ve developed are consistent with that goal,” he added. “I think all three of those really come from the lessons of last time and experience from 2019 and then what happened after.”
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