MNI: Fed's Williams Gauging Credit Impact On Inflation Outlook

Federal Reserve Bank of New York President John Williams Friday said inflation remains a top concern and he will focus on credit conditions to measure the path of interest rates, reiterating guidance that further tightening may be appropriate.

"Our policy decisions will be driven by the data and the achievement of our maximum employment and price stability mandates," he said according to prepared remarks. "I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment, and inflation."

Inflation reached a 40-year high of 7% this past June, he said, and while it has since moderated to 5%, it is still well above the Fed's longer-run goal. "Without price stability, we cannot achieve maximum employment on a sustained basis. That is why it’s so important for the FOMC to use its monetary policy tools to bring inflation down."

DISINFLATION

"While the FOMC has taken decisive steps to bring inflation down, lags exist between policy actions and their effects," he said in a speech to the Housatonic Community College in Connecticut. "I expect inflation to decline to around 3-1/4 percent this year, before moving closer to our longer-run goal in the next two years," he added, slightly increasing his forecast a quarter point since mid-February.

"I expect real GDP to grow modestly this year and for growth to pick up somewhat next year. Slower growth and tighter monetary policy will likely lead to some softening in the labor market. So, I anticipate unemployment gradually rising to about 4-1/2 percent over the next year."

The FOMC last week raised the target range for the federal funds rate to 4.75% to 5%, its ninth consecutive increase. Williams, the vice chair of the FOMC, repeated the Fed's guidance that it "anticipates that some additional policy firming may be appropriate."

(See: MNI INTERVIEW: Powell Nods To Fed Pause But Keeps Options Open)

Williams said receding supply chain bottlenecks are helping bring goods inflation down but non-energy services excluding housing will likely take the longest to bring inflation down fully. Still, the New York Fed chief said longer-run inflation expectations have remained well anchored at levels consistent with the central bank's 2% goal.