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Williams says Fed needs to keep interest higher ‘for a few years’ to kill off inflation

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The president of the New York Federal Reserve said the central bank probably needs to maintain “restrictive” interest rates for a few years to make sure high inflation is restored to pre-pandemic levels.

John Williams said in an interview with the Wall Street Journal that the Fed has a lot more work to do to bring inflation down and restore what economists call price stability.

Yet despite a stunningly strong jobs report in January, Williams said it was appropriate for the Fed to step down to 1/4-quarter point rate hikes after a series of 1/2-point rate increases through most of last year.

The smaller increases, he said, would give the Fed more leeway to calibrate their effect on the economy.

The bank is trying to snuff out inflation without triggering a recession, a delicate balancing act that many economists doubt it can pull off.

Williams said the Fed’s current forecast of a peak short-term rate of 5% to 5.25% was still a good goal.

The bank last week raised its benchmark fed funds rate by 1/4 point to a range of 4.5% to 4.75%. The current scenario suggests the Fed would reach its intended target by May with two more rate hikes.

Fed officials have repeatedly said they plan to maintain higher rates for an extended period to make sure inflation is brought down to its 2% target.

The rate of inflation hit a 40-year peak of 9.1% last summer before slowing to 6.5% at the end of the year, based on the consumer price index.

In economist lingo, a restrictive interest rate is one that is high enough to partly depress economic activity. A neutral rate is viewed as one that neither promotes nor subtracts from economic growth.

Wall Street investors, for their part, remain skeptical the Fed will stick to its get-tough approach. Many expect the central bank to start cutting rates later this year as the economy weakens.


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