(Bloomberg) -- Federal Reserve Bank of New York President John Williams said the US central bank has yet to raise interest rates to levels that are restricting economic growth, and tightening still has “significant” ways to go.
Monetary policy “is not yet in a restrictive place for growth,” Williams told reporters Monday after a speech in Phoenix. “My view is we still have a significant ways to go,” he said, pointing to projections showing Fed officials expected to raise their benchmark interest rate to 4.6% by the end of next year, from its current level just above 3%.
The Fed’s interest-rate increases have sent the dollar soaring in recent months, contributing to volatility in global financial markets, while US stocks have declined amid rising recession worries. Fed officials have been mostly unfazed by those developments, and the New York Fed chief largely steered clear of them in his prepared remarks Monday, though he acknowledged their impact on consumer spending.
“Broad measures of financial conditions, including borrowing and mortgage rates and equity prices, have become significantly less supportive of spending,” Williams said in his speech. “This has led to a decline in activity in the housing market and signs of slowing in consumer and business investment spending. As this continues, I expect real GDP to be close to flat this year and to grow modestly in 2023.”
The central bank on Sept. 21 raised its benchmark federal funds rate by three-quarters of a percentage point for the third time in a row, marking the fastest pace of tightening since the early 1980s in a bid to bring inflation down to its 2% target.
Updated quarterly projections published alongside the decision showed policy makers expected to raise the benchmark by another 1.25 percentage points over the final two policy meetings of the year, implying a fourth straight 75-basis-point hike at the Nov. 1-2 meeting was likely. Investors currently expect such a move, according to prices of futures contracts.
“We need to make sure that we take the actions to get inflation turned around, start bringing it back to our 2% goal,” Williams told reporters. “But clearly, the speed at which we do those actions -- and ultimately how high we need to raise interest rates -- will be driven by the data and how the economic situation evolves.”
Despite the rapid tightening of monetary policy, the US labor market has shown few signs of slowing. The Labor Department will publish its monthly jobs report on Friday, and forecasters expect the unemployment rate held steady at 3.7% in September, according to the median estimate in a Bloomberg survey.
“As a result of slowing growth, I anticipate the unemployment rate will rise from its current level of 3.7% to around 4.5% by the end of 2023,” Williams said in his speech.
Financial markets, on the other hand, have been rocked in recent weeks by higher interest rates. Bank of America analysts warned in a Sept. 30 note that credit stress is at a “borderline critical level,” arguing the Fed needs to slow down.
‘Markets Are Functioning’
The New York Fed chief, speaking with reporters Monday, said thinner liquidity in those markets is consistent with higher volatility, and “core markets are functioning, continue to function reasonably well,” though he added that Fed officials “watch this very carefully.”
“We’ve seen enormous volatility in these markets, not just because of monetary policy, but because of the uncertainty around the outlook, global events -- I’ll underline global events a couple times there -- that have resulted in big swings in Treasury yields and in other market segments,” Williams said.
“Hopefully, the volatility that we’ve seen in the last few weeks will come down somewhat, and that will help with that situation,” he said. “But right now, I would say that trades are being made, market liquidity is definitely lower, but it’s still functioning.”
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