MNI: Fed's Williams Says Credit Conditions To Dampen Spending

Federal Reserve Bank of New York President John Williams Wednesday suggested the U.S. economy remains overheated and policymakers have more tightening to do, even as tougher credit conditions may dampen spending.

"Conditions in the banking sector have stabilized, and the banking system is sound and resilient. Nonetheless, these developments will likely lead to some tightening in credit conditions for households and businesses, which in turn will weigh on spending," said Williams, also vice chair of the FOMC.

Williams pointed to the March FOMC statement that "additional policy firming may be appropriate" and that the Summary of Economic Projections sees monetary policy "restrictive this year and next year." The Federal Reserve is expected to hike the fed funds target range 25bp on May 3 to 5% to 5.25%. The market is pricing in a 30% chance of another 25bp hike in June.

"In addition, the FOMC said it will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities, according to the framework announced last May," he said in prepared remarks. (See: MNI POLICY: Fed Resists Pressure To Retool QT, Reverse Repo)

IMBALANCES ENDURE

PCE inflation has moderated to 5% and recent data shows the trend of slowing inflation is continuing, he said, but inflation is well above the FOMC’s longer-run goal of 2%.

"Despite the moderation of inflation, imbalances endure, with overall demand still exceeding supply in the economy. This is seen in the inflation rate for core services excluding housing, which has been running around 4.5% since last August."

In the labor market, there are indications of gradual cooling in demand for labor, he said. "Job growth continues to be robust. Job openings far outnumber applicants. And at 3.5%, the unemployment rate is near 50-year lows."

The New York Fed chief also added that recent data suggest first quarter growth continues to expand at a solid pace. "I expect real GDP to grow modestly this year as tighter monetary policy continues to take effect, with growth picking up somewhat next year," he said in a speech to the Money Marketeers of New York University.