MNI: Williams Says Fed Should Be Able To Manage Soft Landing

New York Fed President John Williams Saturday said the Federal Reserve should be able to manage achieving a soft landing as it moves to bring down inflation that is too high, and expects the central bank to begin reducing its balance sheet as soon as the May FOMC meeting.

"With inflation too high, we are focused on restoring price stability, while maintaining a strong labor market," he said, referring to the Fed's March SEP that showed interest rates moving somewhat above assessments of neutral by the end of next year. "The actual path for policy will depend on the evolution of economic conditions, the outlook, and risks to the achievement of our price stability and maximum employment goals."

Williams also said a key principle for reducing the Fed's balance sheet is to do it "in a predictable manner" and "can begin as soon as the May FOMC meeting." The New York Fed chief has said he is open to a larger 50 basis point increase in the fed funds rate depending on incoming data.

With low unemployment at 3.6%, solid wage growth, and ample job openings, "all indicators show that the strength of the labor market is at a level consistent with my view of maximum employment," he said, adding he expects the economy to continue to grow this year and for the unemployment rate to remain close to its current level.

The Fed's actions, combined with those of other countries, will reduce demand-induced price pressures and supply constraints will gradually ease. Williams expects PCE inflation around 4% this year, 2.5% in 2023, and close to 2% in 2024.

Still, risks to the outlook remain extraordinarily high, from the BA.2 variant and the war in Ukraine that poses "significant risks to food and energy prices, as well as to global economic growth," said Williams, vice chair of the FOMC. "Even before the war, manufacturers were confronting shortages of important inputs. Further disruptions to these key products could create spillovers to economies across the globe."

The Federal Reserve's "actions should enable us to manage the proverbial soft landing in a way that maintains a sustained strong economy and labor market. Both are well positioned to withstand tighter monetary policy," said Williams, in prepared remarks to the Griswold Center for Economic Policy Studies at Princeton University.