By Michael S. Derby
HARTFORD, Connecticut (Reuters) -Federal Reserve Bank of New York President John Williams said on Wednesday that future monetary policy actions will be driven by economic data as the central bank confronts a high level of uncertainty in large part driven by potential government policy changes.
The official also took note of rising bond yields and said he did not see that as signaling a fundamental shift in investors’ view on the inflation outlook.
“Monetary policy is well positioned to keep the risks to our goals in balance” and “the path for monetary policy will depend on the data,” Williams said in a speech delivered to the CBIA Economic Summit and Outlook 2025 in Hartford, Connecticut.
Williams, who also serves as vice chairman of the interest-rate setting Federal Open Market Committee, pointed to the government as a key source of what limits him in providing guidance about the outlook for monetary policy.
“The economic outlook remains highly uncertain, especially around potential fiscal, trade, immigration, and regulatory policies,” Williams said, “therefore, our decisions on future monetary policy actions will continue to be based on the totality of the data, the evolution of the economic outlook, and the risks to achieving our dual mandate goals.”
At the Fed’s most recent policy meeting held last month central bankers lowered their federal funds target rate range by a quarter percentage point to between 4.25% and 4.5%. As part of updated forecasts, they also trimmed estimates of rate cuts for the current year and pushed up forecasts of inflation in the wake of recent data that had been showing sticky price pressures.
The return of Donald Trump as president has cast a cloud over the outlook, with the president-elect having campaigned on trade and immigration policies economists generally believe will push inflation higher and complicate the Fed’s work of getting inflation back down to 2%.
YIELD SURGE
As Trump’s inauguration approaches, government bond yields, especially those of longer-duration, have risen, signaling a jump in real-world borrowing costs. Speaking with reporters after his remarks, Williams said he did not see the shift as being tied to a wholesale reevaluation of the inflation landscape.
“We haven’t seen a big movement in the inflation compensation” in the market, but there does seem to be a change in how investors are dealing with interest rate risk as measured by the concept of the term premium, Williams said. These higher bond yields appear to be “a reflection both of the strength of the incoming data but also markets’ uncertainty about issues of fiscal policy, other policies, global developments.”
In his formal remarks, Williams said the economy was in good shape and had returned to balance after the disturbances of the pandemic years. He said the process of disinflation is likely to continue but added it could take a while, noting he sees a return to the 2% target “in the coming years.”
Williams also said that he expects growth in the nation’s gross domestic product to moderate to 2% as the unemployment rate holds around 4% to 4.25%.
He also said the Fed’s balance sheet drawdown has been proceeding smoothly, and he told reporters that reserve levels in the financial system still look quite strong, which suggests no imminent end to the ongoing contraction process known as quantitative tightening.
