Fed's Williams says monetary policy well positioned amid a favorable outlook

By Michael S. Derby

NEW YORK, Jan 12 (Reuters) - Federal Reserve Bank of New York President John Williams said Monday he expects a healthy economy in 2026 and indicated he sees no near-term reason to cut interest rates.

The interest-rate-setting Federal Open Market Committee "has moved the modestly restrictive stance of monetary policy closer to neutral," Williams said in a speech delivered before a gathering held by the Council on Foreign Relations in New York.?

"Monetary policy is now well positioned to support the stabilization of the labor market and the return of ?inflation to the FOMC's longer-run goal of 2%," he said.

Williams said that it's critical for the Fed to get inflation back to the 2% target "without creating undue risks" to the job market. He added, "In recent ?months, the downside risks to employment have increased as the labor market cooled, while the upside risks to inflation have lessened."

Williams' comments Monday were his ?first of the year. The Fed is widely viewed as having moved into a holding stage after cutting ?its short-term interest rate target three-quarters of ?a percentage point last year, lowering its federal funds target rate range to between 3.5% and 3.75%.?

The move to lower short-term borrowing costs was driven by policymakers trying to balance a weakening job market ?against inflation that still remains above the 2% target.

At the December meeting, officials penciled ?in one more rate cut this year amid expectations the job market will hold steady and inflation pressures will ease as the impact of President Donald Trump's erratically implemented system of trade tariffs wanes. The most recent job market data shows tepid ?job demand amid still-high inflation.

In a December television interview after the Fed policy ?meeting last month, ?Williams said that he didn't see an urgent need to cut rates again. Other Fed officials have offered similar policy outlooks over recent days, even as the Fed continues to face pressure from Trump and his associates to cut rates aggressively, despite over-target inflation.

In his speech, ?Williams said his economic outlook is "quite favorable." He expects GDP for the year between 2.5% and 2.75%, with the unemployment rate stabilizing this year and retreating in following years. Williams also said that when it comes to inflation, price pressures should peak at between 2.75% and 3% in the first half of this year before ebbing to 2.5% for the year as a whole. He sees inflation back at 2% by 2027.

INDEPENDENCE UNDER ASSAULT

Williams' speech also came amid an unprecedented attack on the independence of the central bank. Late Sunday, Fed Chair Jerome Powell announced the institution had been served with grand jury subpoenas threatening ?a criminal indictment ?related to cost overruns in the renovations of the central bank's headquarters.

In a statement, Powell argued the legal moves were "pretexts" and in reality, "This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions-or whether instead ?monetary policy will be directed by political pressure or intimidation."

Williams?said that while he couldn't speak to any legal investigations into the central bank and its officials, he warned against compromising central bank independence.

Attacking central bank independence "often leads to very unfortunate economic outcomes" that can include "high" inflation, the official said. Williams also said that Chairman Jerome Powell has "proven himself to be a man of impeccable integrity" who had led the Fed through challenging times.

While the impact on financial markets has thus far not been as extreme as some feared, the threat of indictment appeared to generate significant bipartisan pushback in Congress and raised the prospect of the president being unable to install any new members on the central bank ?board until he backs off legal attacks.

Williams attributed some of the relative calm in markets to a lack of clarity about how the political and legal wrangling will play out.

"The markets are reacting to what's happening and are shifting their views" as information comes in, Williams told reporters after his speech. He deemed the moves thus far as moderate and said "markets don't have any conviction ?about how this is going to end" and that's limited a larger shift in asset levels.?

(Reporting by Michael S. Derby; Editing by Cynthia Osterman and Diane Craft)