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MNI POLICY: Fed's Williams: Forward Guidance Soon Not Needed

--Supports Gradual Interest Rate Increases
By Jean Yung
     WASHINGTON (MNI) - Federal Reserve Bank of New York President John Williams
on Friday again called for continued gradual interest rate increases to sustain
the economic expansion but warned that the Fed's policy actions and
communications are evolving as it closes in on its dual mandate of maximum
employment and price stability. 
     The following are the main takeaways from his speech prepared for a
conference at Columbia University in New York: 
     - The Fed will be using less forward guidance on policy as it inches closer
to conducting "normal" policy, and the deletion of "accommodative" to describe
policy in the FOMC's post-meeting statement reflects that evolution. In the
aftermath of the financial crisis, the Fed's forward guidance "reinforced" the
point that rates would head higher toward more normal levels. Now that the
economy has a very strong labor market and inflation is "very near" the Fed's 2%
goal, rates could move in either direction. "At some point in the future, it
will no longer be clear whether interest rates need to go up or down, and
explicit forward guidance about the future path of policy will no longer be
     - Estimates of the neutral rate, or r-star, should not play an oversized
role in discussions about Fed policy. R-star is inherently uncertain, and is
"just one factor affecting our decisions, alongside economic and labor market
indicators, wage and price inflation, global developments, financial conditions,
the risks to the outlook," Williams said. 
     - The Fed plans to make a decision on the appropriate ultimate size of its
balance sheet in the coming months. The shape of the balance sheet depends on
the operating framework of monetary policy. The post-crisis framework, in which
reserves are abundant, "is working very well," Williams said. 
     - Williams supports "further gradual increases" in interest rates. He
expects unemployment to fall slightly below 3.5% next year and price inflation
to edge up "a bit above" 2%, but don't see any "signs of greater inflationary
pressures on the horizon." 
     As president of the New York Fed, Williams votes on every rate-setting
--MNI Washington Bureau; +1 202-371-2121; email:

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