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Fed Officials Support Cautious Policy Given Economic Uncertainty

New York Federal Reserve President John Williams stated that the U.S. central bank's monetary policy is appropriately positioned given the numerous uncertainties in the economy, emphasizing that there is no immediate need to adjust interest rates.

He described the current "modestly restrictive" monetary policy as suitable in light of a strong labor market and inflation levels still above the 2% target. Following his formal speech in the Bahamas, Williams remarked that the Fed will eventually need to reduce rates to a neutral level, but for now, both the downside risk to economic growth and the upside risk to inflation remain significantly high amid rapidly changing government policies.

Williams expressed confidence in the current monetary policy, suggesting a cautious approach: "let's collect more data," and noted that there is no urgency for immediate changes.

Chicago Fed President Austan Goolsbee echoed this sentiment, advocating for patience until clearer conditions emerge. He acknowledged the economy's strength but indicated that he is anxious to observe the effects of President Trump's tariffs, which are expected to complicate inflation further.

Both Williams and Goolsbee commented shortly after the Fed maintained its benchmark interest rate between 4.25% and 4.50% while signaling a potential reduction later this year. They acknowledged significant uncertainty due to the Trump administration's unpredictable policy shifts, which are anticipated to exert upward pressure on inflation in the short term.

Williams observed that the economy began 2025 on solid ground. Although the process of cooling inflation has encountered challenges, he noted an improvement in the job market, which is not a primary factor driving price increases.

Looking ahead, Williams predicted a slowdown in growth, partly due to reduced immigration rates, but acknowledged the difficulty in precisely forecasting economic developments. He suggested that various scenarios could unfold depending on fiscal, trade, and geopolitical factors, making it hard to assign probabilities to these outcomes.

During his remarks, Williams addressed recent data indicating an expected increase in near-term inflation, which, along with other information, reflects a declining public mood as the Trump administration cuts federal spending.

He remarked that there are no indications of inflation expectations becoming unanchored compared to pre-pandemic levels, adding that households anticipate a gradual decline in any inflation shock over the coming years.

Williams also discussed the Fed's recent decision to slow the pace of its balance sheet reduction as it deals with government financing volatility and emerging signs of tightness in money markets. He referred to this move as a "natural next step" in an effort that has already reduced the Fed's holdings by over $2 trillion.

Fed Governor Christopher Waller was the only voting member to oppose the deceleration in the pace of quantitative tightening. Starting in April, the Fed plans to reduce the monthly cap on Treasury runoff from $25 billion to $5 billion, while maintaining the $35 billion cap for mortgage-backed securities.

Waller emphasized that ample liquidity in the financial system allows the Fed to continue bond retirements with minimal risk of destabilizing the markets. He expressed a preference for maintaining the current pace of runoff, highlighting the range of tools available to manage any liquidity fluctuations and advocating for a plan to address the deployment of those facilities.

Ahead of this week's policy meeting, Cleveland Fed President Beth Hammack expressed a desire for a steady reduction of the balance sheet, which is approximately $6.81 trillion, asserting that the Fed's tools could manage any potential market disruptions.