MNI: Fed's Williams Sees Gradual, Bumpy Return to 2% Inflation

New York Fed President John Williams on Thursday said he expects a gradual but not always linear decline in U.S. inflation to persist despite a third month of stronger-than-expected consumer price readings.

"I expect inflation to continue its gradual return to 2%, although there will likely be bumps along the way, as we’ve seen in some recent inflation readings," he said, bumping up his inflation forecast slightly for the year since late February. "I expect overall PCE inflation to be 2.25 to 2.5% this year, before moving closer to 2% next year."

There's been significant progress in restoring balance to the U.S. economy and bringing inflation down, but price growth remains above the central bank's target, he said.

"The economy has come a long way toward achieving better balance and reaching our 2% inflation goal. But we have not seen the total alignment of our dual mandate quite yet. I am committed to achieving maximum employment and price stability over the long term," said Williams.

A third straight month in which CPI inflation came in hotter than expected jolted markets Wednesday and called into question whether the central bank will be able to cut rates until much later in the year. Williams, the vice chair of the FOMC, referred to the March FOMC meeting where officials released projections that "at that time" indicated that if the economy proceeds as expected, "it will make sense to dial back the policy restraint gradually over time, starting this year."

BETTER BALANCE

The economy is strong, imbalances are diminishing, and inflation has come down but remains above the Fed's 2% longer-run target, Williams said. "As has been the case since the onset of the pandemic, the outlook ahead is uncertain, and we will need to remain data-dependent." (See: MNI INTERVIEW: 'Nothing Good' In CPI - Ex-Fed Board's Kamin)

Over the past two years, the FOMC has put in place a restrictive stance of monetary policy with the aim of bringing inflation back to 2% on a sustained basis, Williams said in a speech to the Federal Home Loan Bank of New York.

"Given the progress we have seen, the risks to achieving our maximum employment and price stability goals are moving into better balance."

The New York Fed president expects GDP growth to be about 2% this year, with the unemployment rate peaking at 4% this year and moving gradually down to its longer-run level of 3.75% thereafter.