Williams clarifies future reserve management purchases will not represent a change in monetary policy stance.
“Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.”
Williams notes Latin American central banks raised rates before the Fed during COVID inflation, reversing historical pattern.
“Until COVID-19, central banks in emerging economies, including many in Latin America, typically had followed the lead of the Fed when responding to shocks.”
Williams confirms FOMC kept the federal funds rate at 4.25 to 4.5 percent.
“the FOMC decided at its meeting last week to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent.”
Williams argues centrally clearing standing repo operations would improve participation and enhance monetary policy effectiveness.
“Strictly from a monetary policy implementation perspective, there are likely benefits from offering a centrally cleared version of SRPs.”
Williams sees benefits from centrally clearing standing repo operations to improve participation and enhance interest rate control.
“Centrally clearing SRPs would be one way to reduce such costs. Strictly from a monetary policy implementation perspective, there are likely benefits from offering a centrally cleared version of SRPs.”
Williams says ample reserves lie between $1.5 trillion and the current $3.2 trillion level.
“As I said, it’s hard to estimate exactly what constitutes an ample level of reserves. We know that number is lower than the current $3.2 trillion, since market indicators still point to reserves remaining abundant.”
Williams says inflation is about 4 percent, well above the 2 percent goal, driven by three factors.
“Inflation is unquestionably too high at about 4 percent, 1 well above the FOMC’s longer-run goal of 2 percent. This elevation primarily reflects three drivers.”
Williams clarifies future reserve management purchases will not represent a change in monetary policy stance.
“Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.”
Williams states inflation is at about 4 percent, well above the 2 percent goal.
“Inflation is unquestionably too high at about 4 percent, 1 well above the FOMC’s longer-run goal of 2 percent.”
Williams warns low r-star means more frequent lower bound constraints on policy effectiveness.
“A low r-star implies the economy can encounter more frequent and longer periods when monetary policy is constrained by the effective lower bound on nominal interest rates, potentially impeding the achievement of a central bank’s inflation goals and other macroeconomic objectives.”
Williams cautions policymakers against placing too much confidence in precise r-star estimates when making decisions.
“Although these estimates are useful for analysis and transparency, policymakers are well advised to avoid placing too great confidence in precise estimates of the stars in making real-world assessments and decisions.”
Williams says 75 basis points of cuts in 2025 moved policy closer to neutral from modestly restrictive.
“By reducing the target range for the federal funds rate by a cumulative 75 basis points last year, the FOMC has moved the modestly restrictive stance of monetary policy closer to neutral.”
Williams outlines three key features for monetary policy: consistent strategy, readiness to act, and disciplined adaptation to changing conditions.
“Third, it implies being clear-eyed and disciplined in adapting to and communicating the changing economic landscape and resulting policy trade-offs and decisions.”
Williams highlights June FOMC change allowing temporary pauses in reserve management purchases based on money market conditions.
“Many of you will have noticed that the FOMC implementation note was changed at the June meeting to make explicit that temporary pauses in RMPs could occur if money market conditions warrant.”
Williams says further rate cuts will eventually be warranted to prevent policy from becoming inadvertently restrictive.
“Looking further ahead, if inflation follows the path I expect, further reductions in the federal funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive.”
Williams describes how ample reserves and international facilities support dollar liquidity and market functioning domestically and abroad.
“3 International facilities including the central bank swap lines and the Foreign and International Monetary Authorities (FIMA) Repo Facility help ensure well-functioning U.S. dollar funding markets domestically and abroad.”
Williams notes the Standing Repo Facility has been little used because reserves remained abundant.
“The SRF has been much less extensively used than the ON RRP to date, since reserves have been abundant over recent years.”
Williams argues specific market factors shifted the reserve demand curve downward rather than indicating reserves left ample range.
“I interpret the remaining factors (seasonally low bill supply, increased dealer repo intermediation capacity, reduced repo financing demand, and a temporary increase in government-sponsored enterprise [GSE] repo investment activity) as ones that induced a downward shift in the reserve demand curve.”
Williams reports FOMC maintained fed funds rate at 3.5 to 3.75 percent at mid-June meeting.
“Accordingly, at its meeting in mid-June, the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent in support of the Fed’s dual mandate.”
Williams says monthly RMP pace can likely be significantly reduced after April.
“But, as the Desk said in its statement in December, the monthly pace can likely be significantly reduced after April.”
Williams anticipates moving interest rates toward neutral stance over time if progress continues on dual mandate.
“Looking ahead, if progress on our dual mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time.”
Williams argues historical scholarship shows monetary policy extends beyond short-term rates to broader liquidity and longer-term rates.
“However, this narrow understanding of monetary policy is alien to the history of monetary economics and central bank practice.”
Williams critiques labeling forward guidance and balance sheet policies as unconventional, suggesting this makes them appear suspect.
“Indeed, there even has been a label attached to it: “conventional monetary policy.” By implication, other monetary policy actions that have been used—such as forward guidance and balance sheet policies—are deemed “unconventional,” and therefore somewhat suspect.”
Williams concludes there is no single best way to supply reserves across different jurisdictions.
“In other words, there is no single best way to supply reserves; rather, the best mix of tools depends on circumstances and policy preferences unique to each jurisdiction.”
Williams argues mean spread equaling target does not prove policy optimality under uncertainty.
“Therefore, one cannot judge whether the policy is optimal simply because the mean spread equals its target.”
Williams explains ample reserves deliver adequate liquidity to maintain rate control and smooth functioning.
“In the Fed’s monetary policy implementation framework, an ample supply of U.S. dollar reserves delivers adequate liquidity to the banking system, helping to maintain rate control and smooth market functioning.”
Williams cautions that overconfidence in r-star estimates risks unmooring inflation expectations.
“Given the wide range of uncertainties, acting as if one knows the star variables when making policy can lead to persistent deviations of inflation from the target that risk unmooring inflation expectations.”
Williams says monthly RMP pace will likely be adjusted soon after April tax season.
“An adjustment to our monthly purchase pace is likely to happen soon. Beyond April, the TGA is likely to decline as the Treasury uses the funds it receives via tax inflows to pay its obligations.”
Williams sees policy as modestly restrictive and room for further near-term rate cuts toward neutral.
“Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral,”
Williams says U.S. r-star models show only a modest quarter to half point increase since 2018.
“This finding that r-star has not meaningfully rebounded is in line with evidence from a variety of models of r-star in the U.S., which show a relatively modest increase of one-quarter to one-half of a percentage point in real-time estimates of r-star between the third quarter of 2018 and the first quarter of 2025.”
Williams says potential changes to bank liquidity requirements may eventually reduce reserve demand.
“In particular, future potential changes to bank regulatory liquidity requirements may eventually reduce demand for reserves.”
Williams reports Treasury repo rates fell 15 basis points below IORB in mid-May, causing two basis point EFFR decline.
“Treasury repo rates later notably declined, falling as low as 15 basis points below the interest rate on reserve balances (IORB) in mid-May, though they have since rebounded.”
Williams explains lending facilities cap the spread, mitigating the precautionary motive for holding reserves.
“With a lending facility, the choice of the optimal supply of reserves takes into account the fact that the spread is capped at the lending rate.”