A top official at the US central bank sought to stamp out speculation that the Federal Reserve will not need to squeeze the economy as forcefully as expected, warning that taming inflation may require interest rates exceeding the 5.1 per cent level forecast by most policymakers.
Speaking just days after the central bank slowed down the pace of its policy tightening and raised the federal funds rate by half a percentage point, John Williams, president of the New York branch of the Federal Reserve, countered what he described as an “optimistic” view held by certain investors that elevated inflation will be close to extinguished next year, especially after recent positive data.
While he acknowledged that price pressures were set to ease, he expressed concern that inflation across the “core” services sector, which strips out volatile energy and food costs and reflects the continued strength of the labour market, would prove far harder to eliminate.
“We’ve got a few factors I think are going to bring inflation down to 3 to 3.5 per cent next year, but then the real issue is how do we get it all the way to 2 [per cent],” Williams said in an interview on Friday with Bloomberg Television.
According to projections published on Wednesday, most officials expect a fed funds rate just above 5 per cent will be enough to bring inflation down, while a large cohort signalled it may have to surpass 5.25 per cent. That compares with the 4.6 per cent median estimate from September, the previous time the projections were updated.
“We’re going to have to do what’s necessary — again sufficiently restrictive — to bring inflation down to 2 per cent, and it could be higher than what we’ve written down,” Williams said, echoing chair Jay Powell, who delivered a similar message at his final press conference of the year on Wednesday.
Investors still appear sceptical, however, with traders in fed funds futures markets continuing to wager that the central bank will not need to push its policy rate above 5 per cent. They also have firmed up bets that the Fed will ease policy next year and slash rates.
No Fed official pencilled in a rate cut next year, with the policy rate expected to move down to 4.1 per cent only in 2024.
A warning from the European Central Bank of more rate rises to come, as it and the Bank of England raised their policy rates, knocked global stocks on Thursday and handed the S&P 500 its biggest one-day drop since early November.