MNI: Williams Says Fed Approaching Decision To Normalize Rates

New York Fed President John Williams Friday said the Federal Reserve is approaching a decision to begin ratcheting back its extraordinary accommodative support to the economy during the pandemic back to more normal levels.

"The next step in reducing monetary accommodation to the economy will be to gradually bring the target range for the federal funds rate from its current very-low level back to more normal levels," he said, noting the central bank's decision in December to quicken the withdrawal of asset purchases. "Given the clear signs of a very strong labor market, we are approaching a decision to get that process underway."

Williams, vice chair of the FOMC, is the latest Fed official to signal coming interest rate increases, but the New York Fed leader did not hint at how many rate hikes he sees this year.

Inflation, based on the personal consumption expenditures price index, will likely exceed 5% in 2021, due in large part to strong demand and supply bottlenecks, he said in prepared remarks to the Council on Foreign Relations. He expects growth this year to come in around 3.5%, for unemployment to dip further to 3.5%, and for inflation to fall considerably.

"Just as the pandemic has followed its own script, I anticipate that the dynamics of inflation will also be different than previous cycles," he said. "With growth slowing and supply constraints gradually being resolved, I expect inflation to drop to around 2.5% this year, much closer to the FOMC’s 2% longer-run goal. And looking further ahead, I expect inflation to get close to 2% in 2023."

Williams expects Omicron to slow growth in the next few months as people once again pull back from contact-intensive activities.

"The Omicron wave will temporarily prolong and intensify labor supply challenges and supply-chain bottlenecks that we have been experiencing," he said. "Current staffing challenges for essential service workers in the healthcare, transportation, and education sectors will likely have a ripple effect too. But, once the Omicron wave subsides, the economy should return to a solid growth trajectory and these supply constraints on the economy should ebb over time."