John Williams, president of the Federal Reserve Bank of New York and vice chairman of the Federal Open Market Committee (FOMC), said on Friday (16th) that although inflation has shown some signs of slowing down, a tight job market and other factors may keep prices from rising. Pressure continues to mount, prompting interest rates to remain at peak levels for some time to come. Williams also predicted that the terminal rate next year could be higher than the 5.1% the Fed expected this week.
In an interview, Williams said there were clear signs that demand in the job market and the wider economy was outpacing supply, and forecast a slowdown in inflation next year to a 3% to 3.5% range, but he stressed the real question was how to Let inflation go all the way back down to 2%.
Williams said that if inflation is to be brought back to its 2% target level, the terminal rate may be higher than the Fed expects. He further explained that how high interest rates have to go really depends on what the Fed observes in terms of inflation and supply-demand imbalances.
Williams, meanwhile, played down forecasts by some Fed watchers that the terminal rate could hit 6% or even 7%. He said that the estimated interest rate is not his bottom line, and that the Fed is currently making some favorable progress in reducing inflation, including supply chain easing, commodity and import prices.
Williams stressed, however, that inflation in these core services remains elevated and prolonged, a true reflection of the imbalance between supply and demand in the job market and the broader economy. Williams, on the other hand, doesn’t see a downturn as inevitable, noting that, given the Fed’s current outlook, it’s clearly not in recession yet.
Market Reaction
Williams’ hawkish remarks deepened the intraday decline of major US stock indexes. Before the deadline,Dow Jones Industrial Averagefell more than 450 points or nearly 1.4%,Nasdaq Composite Indexfell nearly 150 points or nearly 1.4%,S&P 500 Indexfell nearly 1.6%,Philadelphia SemiconductorThe index fell nearly 1.4 percent.U.S. 10-Year Treasury Bond Yieldrose to 3.49%,dollar indexIt climbed to 104.34, reversing earlier losses.
According to the CME FedWatch Tool, the US federal funds rate futures market estimates that the probability of raising interest rates by 2 yards (50 basis points) in January next year is 75%, and the probability of raising interest rates by 3 yards (75 basis points) is 25%, and the terminal interest rate falls in the range of 4.75% to 5%.