New York Fed President John Williams said Tuesday the Federal Reserve has work to do bringing down inflation given a labor market that remains "quite strong."
"Inflation is still very high," Williams told Yahoo Finance Live in an exclusive interview on Tuesday. "Some of this core services inflation excluding housing that hasn't budged yet, so still ... got our work cut out for us to get inflation back to 2%."
The latest Consumer Price Index (CPI) data out Wednesday morning will offer investors a key update on whether elevated interest rates are making an impact on inflation pressures moderating. Bigger picture, the question for Williams is what will it take for the Fed to get policy into "sufficiently restrictive" territory wherein higher rates are slowing down growth and, in turn, inflation falls more quickly.
For now, the Fed has penciled in one more quarter-point rate hike this year, bringing rates into to a range of 5-5.25% before hitting the pause button. Williams said this outlook will depend on the data.
One additional rate hike is still the starting point for mapping out policy right now in Williams's view, while he remains open to either raising rates again in May or possibly waiting until the summer depending on the data. Last month, the Fed raised rates by 0.25%, bringing its benchmark interest rate to the highest level since October 2007.
"Job growth is still actually quite strong," he said. "Even in the latest data. So yes, we are seeing some slowing in the demand for labor, but the demand for labor is still very strong. [The] labor market is still very strong."
The March jobs report out last week showed there were 236,000 jobs created last month while the unemployment rate fell to 3.5%. In January of this year, however, there were more than 500,000 jobs created.
Asked whether the Fed could resume raising interest rates after pausing if inflation remains stubbornly high, Williams said "absolutely."
"We need to do what we need to do in order to make sure we bring the inflation down to 2% the next few years," Williams said. "So if inflation ends up being higher, then we'll have to adjust policy appropriately."
Markets are currently pricing in a roughly 70% chance rates rise next month, but expect at least two rate cuts will be warranted by the end of this year according to data from CME Group.
Once inflation starts coming down, Williams said the Fed would need to look at adjusting interest rates — and possibly cutting rates — to ensure that rates are not too high adjusted for inflation, thus slowing the economy more than desired.
"If inflation comes down, we'll need to lower the interest rates because otherwise real or inflation-adjusted interest rates will go up," said Williams. Williams pointed to the Fed's projections for interest rates put out at its March policy meeting, which show rates moving down next year and the year after.
"That’s primarily driven by the fact the inflation is coming down and we'll be moving monetary policy to a more normal stance," he said. "So I think that's an important driver of interest rates eventually coming down."
Williams watching credit conditions closely
Williams also said he's watching credit conditions closely following the collapse of Silicon Valley Bank and Signature Bank last month, but said he's so far not seeing broader impacts on consumer and business spending or other parts of the economy.
"Right now you're not seeing any strong signs of those effects happening, but it's something I’m very much watching for,” he said.
"It clearly could be a negative shock to the economy and cause the economy to slow further. But right now we're not seeing those effects. [Though,] it's still pretty early days in terms of seeing clear signs of changes in credit conditions and credit availability."
For now, Williams said the banking system has "really stabilized" and doesn’t think it would have a large negative impact on the economic outlook.
Asked whether tighter credit conditions could cause the Fed to adjust the pace with which its shrinking its balance sheet, Williams responded: "It's not something that I would see as something we would need to adjust anytime soon."
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