Williams of the Fed says the U.S. economy still does not justify the policy change

A senior Federal Reserve official said the U.S. economy was not yet ready for the central bank to begin withdrawing its strong monetary support, although the outlook had turned pinker.

Comments from John Williams, chairman of the Federal Reserve Bank of New York, were delivered Monday amid high sensitivity of financial markets to Fed policy. Economic projections from central bank officials indicated last week that they expected to raise interest rates in 2023, a year earlier than previously indicated.

Williams said the economy “was improving all the time,” in some of its most bullish comments since the pandemic began. But he insisted the Fed would adhere to the terms of its monetary policy framework, introduced last August, which sets a high bar for tightening policy.

“It is clear that the economy is improving at a rapid pace and that the medium-term outlook is very good.

“But the data and conditions have not advanced enough for the Federal Open Market Committee to change its monetary policy stance in strong support of economic recovery.”

The comments seemed more cautious about the prospect of a rapid policy change compared to those of other Fed regional presidents since the last FOMC meeting.

Speaking to CNBC on Friday, James Bullard, the president of the St. Louis Fed, provoked strong action sell off of US equities when he suggested the central bank could be prepared to raise interest rates as early as next year.

Williams said interest rates would not rise until full employment was reached and inflation had risen to 2% and was “on track” to surpass that target moderately for some time.

He also said any reduction in the Fed’s monthly purchases of $ 120 billion in assets would not occur until “substantial advances” had been made on those fronts.

“In thinking about adjusting its stance in the future, the FOMC has defined conditions and measures that will inform its decision-making,” he said.

On Monday, at an event organized by the Official Forum of Monetary and Financial Institutions, a think tank, Bullard reiterated the need for the Fed to begin proposing a reduction in bond purchases in the face of higher inflation.

Robert Kaplan, president of the Dallas Fed, took a similar tone at the same event.

“It would be healthier, as we are moving forward in the fight against the pandemic and achieving our goals, to start adjusting these purchases (Treasury and mortgage securities) sooner rather than later,” Kaplan said.