Fed’s Williams: Neutral rate less relevant as policy normalizes

Translation: We have no idea where neutral is

  • Expects gradual rate rises

  • Overall economy strong

  • About ‘as good as it gets’ on dual mandate

  • Labor market ‘very strong’, inflation only a bit above 2%

  • Sees 3% GDP this year, unemployment below 3.5% next year

  • Forward guidance less compelling as policy direction becomes less clear

  • Fed yet to decide how much to shrink portfolio

Williams is falling in line with the Fed ethos that was laid out by Powell. They couldn’t agree where neutral is, so they’ve decided to drop the concept. The plan now is just to keep hiking until they find a reason not to.

What’s especially poignant is that Williams was the guru on neutral rates. Now he says the idea received “too much attention”.


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