(Tiper Stock Exchange) – John Williams, the chairman of the New York Fed, does not give much hope to the markets on monetary policy. In an interview with Bloomberg, the governor explained that inflation is still “stubbornly high” and that the Federal Reserve will raise interest rates as necessary to control prices.
Williams acknowledged that inflation has started to slow, but believes prices will need to slow further before the Fed eases its tightening. The banker, close ally of Powelltherefore it is not surprising taking up the message launched this week by the head of the US central bank after the latest rate hike.
The Federal Reserve raised its main interest rate by half a percentage point on Wednesday, marking the seventh increase since March.
On peak rates, Williams said his peers expect it to hit 5-5.5% next year. “Real interest rates need to be cut and stay there,” she said while clarifying that she doesn’t expect the short-term rate to hit 6%, although she doesn’t rule it out.
As for the Fed, the recent Consumer Price Index (CPI) report has revitalized the marketswith government bond yields trending lower and supporting a broadly positive backdrop for risk assets. However, “the Fed’s comments reflected a slightly more hawkish tone than expected” – he declares Harry Richards, fixed income investment manager at Jupiter Asset Management – adding: “It has become clear that the Federal Open Market Committee (FOMC) is aware of the slowdown in inflation observed recently. However, it needs more assurance that this is a lasting trend and that inflation is indeed on the right track He acknowledged that i consumer goods have already shown concrete signs of disinflation and that the trajectory of home-related inflation should soon peak and eventually retrace (just look at the current US housing market rent data).”
However – continues Richards – it registers still uncertainty regarding the services component of the CPI index, as it is clearly much more tied to the labor market, which on a spot basis still appears quite strong. The result was a hike of only 50bp instead of the 75bp gains seen in the last four meetings, but it was complemented by hawkish comments.
In particular, the FOMC stressed the need to make further strides in terms of rate hikes and to keep policy in tight territory for some time to ensure that the battle against inflation is won. Based on our analysis, we continue to believe that the Fed is overestimating the actual strength of the labor market and ultimately we expect official jobs data to deteriorate quite significantly over the next year. The FOMC projections already see some cuts in ’24. If the labor market were to show more consistent signs of weakening in the coming months, an early cut could be envisaged, even as early as the second half of ’23.