RPT:MNI POLICY: Fed Williams: Forward Guidance Soon Not Needed

Repeats Story Initially Transmitted at 20:45 GMT Sep 28/16:45 EST Sep 28

--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

appropriate."

     - 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

decision. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com