Market Expectations Of A Rate Cut Next Year Are Pushed Back By Fed's Williams

Market Expectations Of A Rate Cut Next Year Are Pushed Back By Fed’s John Williams

John Williams, the president of the New York Federal Reserve, said on Tuesday that he expects interest rates to continue rising and to remain at these levels until inflation is brought under control.

Williams told The Wall Street Journal that he is also in the camp of higher-for-longer when it comes to monetary policy, echoing recent remarks made by Fed Chair Jerome Powell.

In a live interview, he said, “We’ll need a restrictive policy for some time.” He continued, “This is not something we are going to do for a short period of time and then change course.”

It is worth mentioning that Powell also used the language “for some time” in describing his expectations for benchmark interest rates just a few days earlier.

Market Expectations Of A Rate Cut Next Year Are Pushed Back By Fed’s John Williams

The Fed chief stated in his annual policy speech at Jackson Hole, Wyoming, that “the historical record cautions strongly against prematurely loosening policy in the near future.”

There is no doubt that Powell and Williams make up the Fed’s policy brain trust, along with Vice Chair Lael Brainard.

A major goal of the government is to reduce inflation, which is near its highest level in more than 40 years and well above the central bank’s target of two percent.

He did not give a specific answer to where he would like to see rates go in the future.

Although, he did note that he believes there will need to be a positive change in real interest rates – i.e., nominal levels minus inflation – in order to reduce inflation.

It is estimated that the Fed Funds rate is currently targeted between 2.25%-2.5%, a range which is well below the central bank’s preferred inflation gauge, which is based on the core personal consumption expenditures price index, which in July stood at 4.6%.

There is no question that real interest rates do need to rise above zero as the demand for goods is much greater than the supply,” Williams said.

In order to slow demand, we need to have a somewhat restrictive policy, and we are not there yet.

According to him, the Federal Reserve is still quite a distance away from achieving that goal.

A recent CME Group report estimates that the Federal Open Market Committee will approve a third consecutive three-quarter point rate increase in September, followed by a half-point increase in November, and a quarter-point increase in December, according to the current marking pricing.

In the fall of 2023, the markets expect the Fed to start cutting interest rates as soon as possible.

The Fed’s Williams said that he has been encouraged by some tightening of financial conditions following the rate hikes, but he added he needs to see more before he considers making any changes to the policy.