Fed's Williams (Voter, Neutral) says the number one issue is inflation, it is running far too high and persistently so. Goal is to get the economy back in balance

ECONOMY

• Bringing the economy back into balance is a challenging task, committed to doing this.


• Not seeing signs of market dysfunction within the Treasury market.


• Events in China and Ukraine war are major drivers of the market volatility.


• Plans to reduce the balance sheet is having an effect on longer-term interest rates.


• Have already seen a tightening of US financial conditions than we'd seen in all of 1994.


• We need to get real interest rates back to zero.


• Sectors most out of balance are the ones that are rate sensitive.


• Need to acknowledge the world is changing and adjust to that as needed.

INFLATION

• His expectation is inflation will be coming down quite a bit next year.


• Reiterates 50bps rate hikes make sense at upcoming meetings.


• Seeing inflation in a broad set of goods.


• Without price stability, will not achieve growth and employment opportunities.


• Starting to see some impact of inflation on spending habits.


• Job Number 1 is to bring inflation down.


• Thinks we will be in this situation for a while.


• We don't know exactly how long inflation will stay high, right now trying to communicate out as far as we can.

BALANCE SHEET

• MBS cap of USD 35bln is a "big number"; does not expect to hit the MBS cap each month.


• MBS sales in the future might be an option to bring the balance sheet more closely to long-run goal of mostly Treasuries.


• Balance sheet reduction itself will occur over the "next few years".


• Primary tool is the Fed Funds Rate


• Need to understand what the effect of MBS sales would be and consider market functioning carefully.

HOUSING MARKET

• Not seeing a lot of risk taking by mortgage lenders, we're seeing high rents as well as high home prices.


• Need more housing supply to meet demand,


• Seeing more increases in rent that we have not seen before.

JOBS

• Right now we have enormous number of job opening.

Analysis details (14:42)

The remarks from Williams follow the April CPI data last week, which saw a hotter than expected M/M core print, but the headline figures and Core Y/Y eased from the prior month, albeit not as much as hoped. There has been nothing to suggest in his remarks that this has changed his views on the normalisation process. Williams reiterated he sees 50bps hikes for the upcoming meetings, noting inflation remains high and persistent and the goal is to bring the economy back into balance. He also said he is not seeing signs of market dysfunction within the Treasury market which also suggests he is not seeing any reasons to dial back on normalisation. 

Analysts have suggested several ways the Fed could inject some dovishness while still taking action to manage inflation in the short term as they normalise monetary policy.

• The Fed could attempt to dial back some of the hawkishness if required by firmly pushing back on a 75bps move, something which has been implied from the Fed Chair and Board of Governors, although some hawks like Mester have refused to completely rule it out. 


• The Fed could also start to imply a lower neutral rate, perhaps aided by the argument that the balance sheet reduction will be the equivalent of 25bps worth of tightening over a year.


• They could also imply a rate hike "pause", something only Bostic has spoken of recently, where they would put rate hikes on hold after the 50bps hikes to assess the economy before acting, although many expect the Fed will hike by 50bps for the next 2-3 meetings, and then move to 25bps increments. 

16 May 2022 - 14:02- Fixed IncomeData- Source: Newswires