MNI: Williams Says Fed Has Begun To Reduce Price Pressures

New York Fed President John Williams said Monday tighter monetary policy has begun to cool demand and reduce inflationary pressures, though the central bank still has more work to do.

Williams, also vice chair of the rate-setting FOMC, added that large and rapid shifts in monetary policy across the globe could contribute to stresses and expose vulnerabilities in global financial markets.

"Heightened uncertainty can add to market volatility, resulting in diminished market liquidity," he said in remarks prepared for the Economic Club of New York. "Importantly, Treasury and funding markets continue to function well, effectively transmitting monetary policy to broader financial conditions."

Williams says he expects cooling global demand and steady supply improvements to result in declining inflation for goods that rely heavily on commodities, as well as for those that have been heavily affected by supply chain bottlenecks.

He gave no hint of his views on the terminal fed funds rate or preferred policy move at the December meeting, though the Fed's November meeting minutes released last week showed a "substantial majority" of officials judged a slowing in the pace of increases would likely soon be appropriate, while "various" members saw a somewhat higher terminal rate than previously expected.

UNDERLYING INFLATION

Williams said inflation should slow to between 5% and 5.5% at the end of this year, and further to between 3% and 3.5% next year. Williams anticipates the unemployment rate will climb to between 4.5% and 5% by the end of next year.

"Overall, the combination of waning global demand, improving supply, and falling import prices from the strong dollar points to slowing core goods inflation going forward," he said in prepared remarks. (See: MNI INTERVIEW:US Inflation Likely At Turning Point-SF Fed Econ)

"However, lower commodity prices and receding supply-chain issues will not be enough to get inflation back to our 2 percent inflation goal — it’s the innermost layer where the hard work lies," Williams said, likening price pressures to peeling back layers of an onion. "Overall demand for labor and services still far exceeds available supply, resulting in broad-based inflation, which will take longer to bring back down."

"Further tightening of monetary policy should help restore balance between demand and supply and bring inflation back to 2% over the next few years," Williams said.