MNI: Williams-Cuts When Confident Prices Sustained Toward 2%

New York Fed President John Williams on Wednesday said he expects the central bank to keep a restrictive stance for some time and to begin rate cuts only when confident inflation is moving toward 2% on a sustained basis, also noting a slowing of QT does not seem to be close.

"My base case is that the current restrictive stance of monetary policy will continue to restore balance and bring inflation back to our 2% longer-run goal," he said in prepared remarks. "I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals, and it will only be appropriate to dial back the degree of policy restraint when we are confident that inflation is moving toward 2% on a sustained basis."

"Our policy decisions will be made meeting by meeting and will follow another rule of three: by looking at the totality of the incoming data, the evolving outlook, and the balance of risks," Williams said. "The data indicate that we are clearly moving in the right direction. However, we still are a ways from our price stability goal." (See: MNI INTERVIEW: Fed To Ease Modestly In '24 -Ex NYFed's Benigno)

Williams, vice chair of the FOMC, said things are "looking very good" for the Fed's maximum employment mandate. His baseline forecast is for GDP growth to slow to about 1.25% this year and for the unemployment rate to rise to around 4%. PCE inflation is expected to slow to about 2.25% this year, before reaching the Fed's 2% longer-run goal in 2025.

QT TAPER/STOP NOT CLOSE

Williams said the Fed's QT program is "working exactly as designed" and thus far there are "no signs of adverse effects on market functioning."

The FOMC has said it intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves. "So far, we don’t seem to be close to that point," Williams told the Bronx Economic Development Corporation.

The decline in Fed securities holdings has been absorbed almost entirely by a drop in the ON RRP facility, he noted. "As a result, aggregate reserve balances are little changed from their levels in mid-2022, when balance sheet reduction started."

"Looking ahead to this year, as the balance sheet continues to shrink and usage of the ON RRP continues to decline, we will closely monitor money market conditions and the demand for reserves."