MNI: Fed's Williams Sees Rates Rising to Neutral By 2023

Federal Reserve Bank of New York President John Williams told reporters Friday he sees the Fed's benchmark fed funds rate rising "steadily" to neutral by the end of next year with no need for an outsize move to begin the tightening cycle.

"We have clearly opportunities to take policy actions starting in March. Personally I don’t see any compelling argument to make a big step at the beginning. There’s no need to do something extra at the beginning of the process. I think we can steadily move up interest rates and reassess," he said.

Markets are increasingly pricing in front-loaded rate hikes as stronger-than-expected data on inflation and employment have come in, he noted, but "that basic path of moving from zero interest rates back to a more normal fed funds rate of two or two-and-a-half by the end of next year has stayed the same."

"You're moving over time to neutral next year at some point," he said.

ASSET SALES

Actively selling some of the agency mortgage-backed securities the Fed bought during the pandemic is "an option that we should discuss" but "not something front and center on my mind right now," Williams said.

The Fed aims to move to a primarily Treasuries portfolio over the long run, and selling MBS would "expedite the process," he said, adding it's a question for "future years."

At the FOMC's January meeting, "many participants commented that sales of agency MBS or reinvesting some portion of principal payments received from agency MBS into Treasury securities may be appropriate at some point in the future," according to the minutes of the FOMC meeting released Wednesday.

Earlier Friday, former Fed vice chair Don Kohn told MNI the Fed may need to hike rates past neutral.