Fed's John Williams signals more rate hikes as inflation remains persistent

Federal Reserve Bank of New York President John Williams indicated that further interest rate increases are likely as the US central bank continues its efforts to bring stubbornly high inflation back to its 2% target.

Speaking at the UC Berkeley Alumni Salon in New York on Thursday, Williams said the US economy remains strong, the labour market continues to strengthen and inflationary pressures remain persistent. He stressed that monetary policy still needs further adjustment to bring inflation under control on a sustained basis.

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However, Williams did not specify when the Federal Reserve might next raise interest rates or how much further borrowing costs could increase.

Financial markets broadly expect the Fed to raise its benchmark federal funds rate by 25 basis points from its current 3.75%-4% range at the next Federal Open Market Committee (FOMC) meeting in early December. Another rate increase is also anticipated in January.

The outlook for monetary policy has become increasingly uncertain following stronger-than-expected inflation data released this week. Core inflation increased 0.3% in October, a pace that Fed Governor Christopher Waller had previously indicated could make a 50-basis-point rate hike a possibility in December.

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However, policymakers remain divided over the pace of further monetary tightening. Cleveland Fed President Beth Hammack has advocated a more gradual and steady approach to interest rate increases, arguing that it would give the economy time to adjust to higher short-term borrowing costs.

Fed has limited ability to reverse higher cost of living

Williams also addressed concerns about the elevated cost of living following the sharp inflation surge over the past five years, acknowledging that the Federal Reserve has limited ability to bring down the overall price level.

The central bank primarily uses interest rates to influence the pace at which prices rise rather than reverse increases that have already occurred. Consequently, while monetary tightening can slow inflation, it cannot automatically restore prices to their levels before the pandemic-era surge.

According to Reuters, Williams cautioned that attempting to reverse the cumulative increase in prices could create significant economic distortions and damage.

He explained that central banks over recent decades have increasingly focused on maintaining low and stable inflation rather than trying to undo the price increases caused by extraordinary events such as wars and pandemics.

This approach, however, comes with consequences, including a permanently higher cost of living for households, Williams acknowledged.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times.)