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Williams: Fed should keep raising rates despite flatter yield curve

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According to Market Intelligence, December 2022

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Williams: Fed should keep raising rates despite flatter yield curve

The Federal Reserve's path of gradually raising interest rates remains appropriate even as the yield curve is getting flatter, New York Fed President John Williams said Sept. 6.

Williams' comments add to the internal debate at the Fed over whether the central bank should be concerned that their interest rate hikes could lead to a yield curve inversion, where shorter-term rates jump above longer-term ones.

An inverted curve has typically signaled a recession would be on its way in several months, prompting three Fed officials a day earlier to say they remain worried about the issue.

The Fed should not ignore the yield curve, Williams said at a University of Buffalo event. But the Fed should consider it as just another data point it reviews as it continues to tighten monetary policy, he added. He also reiterated his view that the Fed's large-scale asset purchases after the financial crisis may be distorting the signal, given the central bank's increased involvement in the bond market.

Williams said the Fed should not be focused on "whether the yield curve moves a little bit one way" or another. Rather, he said, it should focus on ensuring it can consistently achieve its dual mandate of maximum employment and stable prices.

He also told reporters after the event he does not think the yield curve should be "the deciding factor in terms of where we should go with policy," according to The Wall Street Journal.

The U.S. is currently seeing a "Goldilocks economy" from a policymaker's point of view, he said during the event, noting that job growth remains steady and inflation is around the Fed's 2% goal with little sign of a major acceleration.

The lack of inflation pressure means that the Fed also does not "really need to raise interest rates more quickly" than it has signaled, he added. Fed officials have penciled in two more rate hikes this year.