Fed's Williams: Rate Hikes Must Be Patient, Data Dependent

The U.S. Federal Reserve must be patient and guided by data when considering whether to raise interest rates, New York Fed President John Williams said on Friday, in remarks reinforcing the central bank's commitment to a wait-and-see approach.

Williams said inflation pressures remain mild yet the economic "tailwinds" that boosted the economy in 2019 "have lost their gust," including due to an ongoing partial shutdown of the U.S. government.

If those pressures cause the economic outlook to deteriorate, the Fed could pause rate hikes or adjust the path of balance sheet normalization, Williams said.

"The approach we need is one of prudence, patience, and good judgment - the motto of 'data dependence' is more relevant than ever," he said in remarks prepared for delivery to the New Jersey Bankers Association.

"If growth continues to come in well above sustainable levels, somewhat higher interest rates may well be called for at some point. However, if conditions turn out to be less robust, then I will adjust my policy views accordingly," he said.

He also said financial conditions have become less accommodative and we are “seeing some emerging headwinds to growth from the partial government shutdown in the United States and elevated geopolitical uncertainties abroad."

The remarks come as Fed policymakers have signaled a willingness to wait to deliver more rate hikes until they have a better handle on whether slowing global growth and financial market volatility will undercut an otherwise solid U.S. economic outlook.

In separate appearances in recent days, policymakers from across the spectrum of views agreed the central bank should pause further rate hikes until it is clear how much the U.S. economy will be held back by larger risks like slowing growth in China and narrower ones like the ongoing budget stalemate in Washington.

Williams said the challenge facing policymakers in recent years is that inflation has been too low, not too high, suggesting that rate hikes used to slow price pressures may not be warranted. Williams said he said expects inflation to be right at the Fed’s 2 percent target, with no signs the economy has pressure building in it that would push prices higher despite a strong labor market and rising wages.

But there is, he said, increasing anxiety in the markets about economic growth this year. Since October, when signs emerged that global growth is slowing, financial markets have grown increasingly skeptical that the Fed can continue tightening much longer.

The Fed increased interest rates three times in 2017 and four times last year, pushing them up to 2.25 percent to 2.5 percent at its final 2018 meeting in December. It is signaling it would probably raise rates two more times this year.

Fed Chair Jerome Powell and other U.S. central bankers who pushed the rate hikes last year have sought in recent weeks to project a more flexible approach this year.