Top Fed official says US rate hike won’t cause recession

According to a senior US Federal Reserve official, the US central bank is “very focused” on keeping inflation “too high” and should be able to do so without triggering a recession.

John Williams, president of the New York Fed, endorsed the central bank decision this week to accelerate the downsizing of its asset purchase program so that the stimulus program ends several months earlier than original sketch in November.

This is the “correct thing to do,” he said, giving the Fed some flexibility to tighten monetary policy more fundamentally next year.

“It’s really putting our monetary policy stance in a good place and obviously creating options, at some point next year,” Williams said in an interview with CNBC. , to really start increasing the target range of federal funds.

Christopher Waller, a Fed governor, said separately on Friday at an event hosted by the New York Forecast Club that the revised schedule would end in March, shortly after the Fed would raise interest rates.

“I believe an increase in the target range for the federal funds rate will be warranted as soon as our asset purchases close,” he said.

According to new projections released by the Fed this week, officials expect three rate hikes in 2022, followed by three more in 2023. A two-tier adjustment is also expected. out in 2024, bringing the main policy rate closer to 2%. .

Animated dot chart showing Fed projections over time

Forecasts suggest the pace of rate hikes next year will be significantly faster than Fed officials expected when they last made their forecasts three months ago.

They come after strong economic data and clearer signs that inflation is becoming a more persistent issue, spreading to sectors beyond those most sensitive to related disruptions. to the pandemic.

“We pay close attention to inflation; It’s obviously too high right now,” Williams said on Friday. “We want to make sure inflation gets back to our 2 percent long-term target.”

Waller, who has described inflation as “alarmingly high”, said he thinks the economy is “closed to maximum employment” – the last condition that needs to be met before the Fed proceeds to raise rates. .

Current market price suggest that, by taking a positive stance early on to counter upward pressures, the Fed will be limited in its ability to raise rates significantly later on as economic growth slows.

Implied interest rates on the Sofr and Eurodollar contracts from 2024 to 2026 currently hover below 1.5%, well below the 2.5% longer-term target expected by most Fed officials.

Williams offered some reassurance on Friday, saying he felt “confident” that the Fed could deliver “stable low inflation” without triggering a sharp slowdown in economic growth.

He said higher interest rates should really be taken as an indication of how strong the economy is already.

“I go into next year feeling [like] The underlying outlook is a very good one,” he said. “So actually raising rates would be a sign of a positive development in terms of where we are in the business cycle.”

Williams predicts the labor market will continue to “improve strongly” and the market is starting to regain momentum. The unemployment rate is currently 4.2%.

Fed officials expect the rate to fall to 3.5% next year, with inflation still rising at 2.7% and the economy expanding at 4%.

Waller flagged the Omicron variant as a “major uncertainty”.

“We also don’t know if Omicron will exacerbate labor and commodity supply shortages, while also adding to inflationary pressures, making next year’s inflation moderate it’s unlikely,” he said. my basics”. Top Fed official says US rate hike won’t cause recession

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