Williams is offering up a fairly straightforward assessment of the US economy and the policy outlook today. His key comments:
- The US economy has shown remarkable resilience
- The downside risks to achieve maximum employment have diminished
- The biggest obstacle now is inflation
- The Fed’s aim is to return inflation to target promptly
- It seems “reasonable” to implement another rate hike by the end of the year
- The era of explicit and direct forward guidance is over
- We do not know if higher yields will continue to persist
The key takeaway for me is how Williams is framing the balance of risks. The Fed had already raised interest rates by 25 bps last week to 3.75% to 4.00%, reinforcing a “timelier” return towards returning inflation to the 2% target in its statement. And Williams’ remarks mainly reinforce that sentiment.
The signal here is that if policymakers are less worried about employment deteriorating, there is simply more room to keep leaning against inflation.
That said, he’s still not explicitly framing this as a promise of another rate hike. His point that the era of explicit forward guidance is over reinforces the notion that the Fed wants to be able to retain flexibility and optionality.
Higher Treasury yields can do some of the work for the Fed in terms of tightening financial conditions. But at some point, policymakers still have to act themselves – as we saw with last week’s decision.
For now, his comments do fit somewhat with how markets are repricing the Fed outlook. The odds of another 25 bps rate hike in October have climbed to around 77%, while December pricing is starting to entertain something more aggressive still.
This article was written by Justin Low at investinglive.com.