MNI: Fed's Williams Leaves Open Option For Another Hike

New York Fed President John Williams on Friday said the Fed is "at, or near, the peak level" of interest rates and will need to maintain a restrictive stance of monetary policy "for some time" to bring inflation back to 2%.

"We face two-sided risks. Our decisions, as always, will be guided by the data, with our eyes squarely on our goals," he said in remarks published on the Fed bank's website. "We are doing well on our maximum employment mandate, but we still have a ways to go to fully restore price stability."

Williams, vice chair of the FOMC, said inflation, though off last year's peak, is still too high and demand still outstrips supply. Underlying inflation has been coming down gradually, and data on rents for newly signed leases point to further declines in shelter inflation in coming months, he said. "I foresee inflation of around 3.25% for this year as a whole, declining to around 2.5% next year, before closing in on 2% in 2025."

He expect to see a dip in growth next year to about 1.25% and the unemployment rate to rise "modestly" to a little over 4%.

The Commerce Department reported Friday the August PCE price index excluding food and energy saw its smallest monthly increase since November 2020. At 0.1% for the month, it was also a tenth lower than markets expected. On a 12-month basis, the index was up 3.9%. (See MNI INTERVIEW: Fed's Wright Optimistic On Further Disinflation)

LABOR MARKET RETURNING TO BALANCE

"There are numerous signs that labor market imbalances are diminishing," Williams said. "The overall labor market is strong, as seen in the unemployment rate of 3.8%, which equals my estimate of the unemployment rate expected to prevail in the economy in the longer run."

Surveys of employers and households both show a return to pre-pandemic conditions, he said, also noting that the number of job openings has declined toward more normal levels. (See MNI INTERVIEW: Labor Hoarding Improves Odds Of US Soft Landing)

"Wage growth has slowed considerably from earlier peaks," he said. "But there are limits to how much further supply will increase going forward, and further reductions in demand are needed to bring balance to the labor market."