Fed's Williams Hints Next Rate Increase Can Wait

Dow Jones
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A top Federal Reserve official suggested Tuesday that the central bank could wait until December before raising interest rates again, pushing back against market bets on a follow-up increase next month.

The remarks from New York Fed President John Williams carry particular weight because as vice chair of the Fed's rate-setting committee, he has typically sought to reflect the views of the committee's center of gravity rather than stake out his own position.

Inflation remains too high, and another rate increase "late this year" might be appropriate, Williams said. But for now, the Fed can likely take time to review additional data before tightening policy further, he said.

"With the policy action we took at our September meeting, there is no need for urgency," Williams said in a speech in Buffalo, N.Y.

Policymakers' forecasts of at least one further rate increase this year, and a more hawkish tone from Fed Chairman Kevin Warsh, had left many traders betting after this month's meeting that a second increase would follow next month.

On Tuesday afternoon, odds that the Fed would raise rates on Oct. 28 fell to near 50% after sitting around 70% before Williams spoke, according to CME Group.

Williams's relatively precise signals were notable because Warsh has renounced the kind of verbal cues his predecessors used to shape investors' expectations ahead of policy meetings. That approach carries a risk: If markets come to expect a move officials aren't prepared to make, the Fed must choose between surprising investors and following through on an increase it might think isn't necessary. Williams's comments Tuesday could help the central bank avoid that bind.

Long-term interest rates have steadily marched to new 19-year highs in recent weeks, which could further restrain borrowing and spending if the moves hold. The yield on the benchmark 10-year Treasury note rose to 5.25% on Tuesday, up from 5% when the Fed raised rates on Sept. 16.

The Fed's preferred inflation metric, which hit 3.7% in its most recent reading for July, has been drifting well above the central bank's 2% target for more than five years. Williams argued, however, that some underlying inflation pressures are easing on their own. Housing prices, a major spending category for consumers, have decelerated, he noted, and though the labor market remains solid, wage increases don't seem to be pushing up consumer prices.

Political sensitivities could give Fed officials another reason to hold off. Raising rates six days before the midterm elections might be awkward for a central bank that doesn't see particular urgency to move interest rates sharply higher.

Other Fed officials who, like Williams, typically vote with the Fed's policy consensus, have signaled in recent days that they think rates should rise further, without laying out a particular timeline.

In a speech Tuesday, Fed governor Michael Barr said "further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion," but didn't specify his view of the urgency of a further rate increase. Governor Lisa Cook outlined a similar perspective in a speech Monday.

By the time they meet in October, Fed officials will have one more month of labor-market data in hand-the September jobs report, due Friday-and a September inflation update coming in two weeks.

 

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