Traders, investors and economists across the world heaved a sigh of relief when the Federal Reserve announced a pause in interest rate hikes after increasing the rate by 25 basis points.
The latest hike has increased the interest rate to 5.25%, which is the highest since 2007.
While granting banks a much-needed pause the Federal Reserve’s president warned that this does not mean there won’t be further interest rate hikes. Williams reaffirmed the central bank’s commitment to its target of 2% inflation in the next two years. However, the president did not give any precise guidelines on the Federal Reserve’s policy moving forward.
The Federal Open Market Committee, the FOMC, voted to increase the benchmark lending rate by 25 basis points on Wednesday, 3rd May. After the decision committee had hinted at a short-term pause in lending rate hikes. The committee had omitted a key phrase in their statement which stated that the committee felt it appropriate to raise interest rates further.
Speaking about the decision of the committee Willams said
“I do not see in my baseline forecast, any reason to cut interest rates this year,”
Williams, one of the key voters on the FOMC, was speaking six days (9th May) after the decision at the Economic Club, in New York. He said that the committee would wait and analyze the incoming data before making any decisions. He pointed out that the effects of the lending rate hikes were yet to be felt by the economy. There is always a lag between policy action and its impact.
Williams added that he expects the unemployment rate will increase to 4% – 4.5% in the near future. Unemployment is at a 54-year low of 3.4% currently.
John Williams assured the press that he will look at the problems currently facing the banking industry and they will factor in any policy decision he makes.
“I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment and inflation,”
-John Wiliams
There were some positive signs that Williams pointed out. The long-term inflation rate projections have been moderate. The demand in the labor market has also cooled down. This high demand was pushing the wages upwards, which could have pushed inflation up further. Although they continued to be inadequate to keep up with the cost-of-living increase.
