Fed’s Williams Sees Rates Heading to Around 4.5% to Cool Prices

(Bloomberg) – John Williams, President of the Federal Reserve Bank of New York, said interest rates need to rise to about 4.5% over time, but the pace and eventual peak of the tightening campaign would depend on how the economy fares developed.

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“The timing of that and how much we need to raise interest rates will depend on the data,” Williams said Friday during a moderated discussion organized by SUNY Buffalo in western New York. “Right now the focus is on bringing inflation back to 2% and doing so in a way that keeps the economy growing.”

Williams is vice chairman of the rate-setting Federal Open Market Committee and a key member of Chairman Jerome Powell’s executive team. His comments follow a series of hawkish comments from other policymakers who have bolstered bets that they will press ahead with their aggressive tightening campaign to curb the hottest inflation in nearly 40 years.

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Fed officials are raising interest rates at the fastest rate since the 1980s as they aim to quell the hottest inflation in a generation. Policymakers are expected to hike interest rates by 75 basis points for a fourth straight meeting in early November after data on Friday showed unemployment unexpectedly returned to a historic low of 3.5%.

That would put the Fed interest rate in a range of 3.75% to 4%. Median projections from Fed officials show they expect rates to rise to 4.4% by the end of this year and 4.6% by 2023 Prices and Wages.

Officials say they will include a range of economic data at their next meeting on November 1-2, including an update on consumer prices coming next week. Williams said officials are taking into account what is happening with the global economy.

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Williams said interest rates are still low by historical standards and the central bank needs to “bring its interest rate down to somewhere around 4.5% over time” to stop spending and instead dampen it.

The Fed’s swift action, which has raised interest rates by three percentage points since March, has rattled global financial markets and sent the dollar higher against other currencies.

Williams acknowledged that the Fed’s actions have international ramifications and said he is in touch with his counterparts at foreign central banks, who are also facing high inflation. However, he emphasized that the Fed’s focus is on its domestic goal of restoring price stability.

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“We are all working alone to make decisions to bring the economy back into balance,” he said.

The New York Fed chief said he sees US economic growth slowing but expects it to remain positive next year. He expects the labor market to weaken and the unemployment rate to rise in response to higher rates.

“But most importantly, I see inflation coming down significantly next year,” he said. “I see us on the right track to slowing the economy down a bit while reducing inflation over the next few years.”

(Updates with more comments from Williams from second paragraph)

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