(Yahoo!Finance) - New York Fed President John Williams pushed back again Wednesday against Wall Street hopes for quick interest rate cuts, predicting that would happen only when the central bank is convinced inflation is moving closer to its 2% target.
"I expect that we will need to maintain a restrictive stance of policy for some time to fully achieve our goals," Williams said in a speech in White Plains, N.Y., "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."
It is the second time in two months that Williams has pumped the brakes of rate cut expectations. In December he said at the Fed "we aren’t really talking about rate cuts right now."
Today he said that while inflation has improved "significantly," there’s still "a ways to go."
The comments are the latest example of how public commentary from Fed officials doesn't match the expectations of investors who predict the first cuts will happen in March and that six rate cuts will happen this year — double the median of three rate cuts projected by all Fed officials.
Investors became more optimistic about cuts following the Fed's last meeting in December. Fed Chair Jerome Powell made it clear in a press conference following that meeting that central bank officials had started the conversation of when to dial back policy restraints, calling it a "topic of discussion" and "a topic for us looking ahead."
The markets rallied on Powell's comments. The Fed last raised rates in July to a 22-year high, as part of an aggressive campaign to cool inflation.
But several officials, including Williams, poured cold water on the investor enthusiasm with their public comments in the days and weeks following Powell's press conference.
Two other Fed officials — Fed Governor Michelle Bowman and Atlanta Fed President Raphael Bostic — also urged caution in their comments this week, saying they believe that holding interest rates at current levels for some time could bring inflation back down to the central bank’s target.
A new look at inflation will come tomorrow when the December Consumer Price Index is expected to show a slight increase in annual headline inflation to 3.2%, up from the 3.1% increase seen the month prior.
But when removing the volatile food and energy categories, economists expect "core" inflation fell to an annual rate of 3.8% from 4.0% the month prior.
Williams on Wednesday cited "significant progress" in a key measure of inflation known as "core services inflation," noting that shelter inflation is slowing as the growth of rents for newly signed leases is returning to pre-pandemic levels.
He says he’s encouraged that the job market is coming back into better balance, a key piece of what the Fed needs to happen for inflation to come down.
Williams pointed to improvement in supply of workers, from higher participation in the labor force to immigration that has returned to pre-pandemic levels.
But he said there are limits to how much supply can increase, and some further moderation in demand is likely needed to fully return balance to the labor market.
He expects inflation to continue to slow to about 2.25% this year, before reaching the Fed’s 2% longer-run goal next year.
By Jennifer Schonberger · Senior Reporter
