Fed’s Williams Says One More Hike Is ‘Reasonable Starting Place’

(Bloomberg) — Federal Reserve Bank of New York President John Williams said policymakers still have more work to do to bring down inflation and suggested they won’t change course despite uncertainty from turmoil in the banking sector.

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Williams said the March outlook of policymakers for one more interest-rate hike this year, followed by a pause, is a “reasonable starting place” — though the path will depend on incoming economic data.

“We need to do what we need to do in order to make sure we bring inflation down,” Williams said Tuesday in an interview with Yahoo! Finance. He said inflation is coming down but but remains well above the Fed’s 2% goal, adding that a key underlying measure of prices has barely budged recently.

“We’ve seen the data come in consistently strong” and inflation has remained very high, Williams said. The economic impact of recent bank turmoil is uncertain, he said.

Fed officials lifted interest rates by a quarter percentage point last month, bringing their policy benchmark to a target range of 4.75% to 5%, up from near zero a year earlier.

Forecasts last month showed the 18 officials expected rates to reach 5.1% by year-end, according to their median projection. That implies one more quarter-point hike. Investors bet the Fed will make that move at its next meeting on May 2-3, but will cut rates later this year — something officials don’t see, according to their forecasts.

Williams said the market expectations reflect forecasts for recession as well as a sharper slowdown in inflation.

“We’re seeing signs of inflation slowing but inflation is still very high,” he said. “Some of this core services inflation, excluding housing, that hasn’t budged yet. So still kind of got our work cut out for us to get inflation back to 2%.”

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Fed officials have moved rates to a level that is “somewhat restrictive,” Williams said, and must now determine how much more it will take to bring them to a sufficiently restrictive level.

“Obviously it will be driven by the data and the outlook,” he said. The Fed’s balance-sheet reduction plan, known as quantitative tightening, or QT, is also “going very smoothly” and does not need to be adjusted in the near term, Williams said.

A string of bank collapses last month has added new uncertainty to the outlook this year. Fed officials have said it’s too soon to know how much lenders may tighten credit, and the effect that will have on the broader economy.

Williams reiterated that policymakers will closely monitor incoming data for signs of a negative shock, but “right now we’re not seeing those effects. And actually the banking system has really stabilized.”

(Updates with additional Williams comments in eighth paragraph.)

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