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NY Fed's Williams: Inflation expected to decline, no rate cuts until progress seen

Inflation expected to decline, no rate cuts until progress seen

New York Fed President John Williams stated on Thursday that he anticipates a decline in inflation during the latter half of the year. He emphasized that the central bank will not lower interest rates until there is more significant progress in reducing inflation. Williams made it clear that despite recent fluctuations in inflation figures, the Federal Reserve remains committed to its goal of ensuring price stability before making any adjustments to interest rates. He stressed the importance of sustained progress in achieving lower inflation rates as a prerequisite for any potential rate cuts.

In his speech at the Economic Club of New York, Williams explained, "I interpret some of the recent inflation data as primarily reflecting a correction from the unusually low figures recorded in the latter part of last year, rather than indicating a disruption in the overall downward trend of inflation." He emphasized that these recent readings should not be misinterpreted as a reversal in the progress made towards reducing inflation. Instead, they should be seen as a normalization following an atypically low period, reinforcing the overall downward trajectory that inflation has been following.

Williams elaborated further by saying that as the economy gradually achieves better balance and as disinflationary trends in other countries ease global inflationary pressures, he expects inflation to continue to moderate in the second half of this year. He highlighted that the alignment of the domestic economy, along with the reduction in international inflationary pressures, would contribute significantly to the anticipated decline in inflation. This balanced economic growth, coupled with global economic trends, supports his expectation that inflation will resume its downward path.

He reiterated the language used in the Federal Reserve’s latest policy statement, which asserts that it will not be appropriate to lower the target interest rate range until there is greater confidence that inflation is moving steadily towards the 2 percent target. Williams underscored the central bank’s commitment to its inflation target, emphasizing that any decisions regarding interest rate adjustments will be data-driven. This approach ensures that the Federal Reserve will only consider rate reductions when there is clear and convincing evidence of sustainable progress towards the 2 percent inflation goal.

On May 1, the Federal Reserve decided to maintain its benchmark interest rate within the range of 5.25% to 5.50% as part of its efforts to achieve its 2% inflation goal. This decision reflects the central bank’s cautious approach in managing monetary policy to control inflation while supporting economic growth. By keeping interest rates steady, the Federal Reserve aims to strike a balance between curbing inflationary pressures and fostering a stable economic environment.

Since that last meeting, many Fed officials have emphasized the importance of keeping rates steady for an extended period while assessing the trajectory of inflation. This consensus among policymakers highlights the central bank’s strategic patience in waiting for clearer signs of inflation dynamics before making any policy adjustments. The emphasis on stability and careful evaluation underscores the Federal Reserve’s commitment to its inflation targets and overall economic stability.

Minutes from the May 1 meeting, released last week, revealed that some policymakers were open to the idea of raising rates if necessary. This discussion indicates a willingness among some Federal Reserve officials to take further action if inflation does not show the desired downward trend. The possibility of additional rate hikes remains on the table as a precautionary measure to ensure that inflationary pressures are adequately addressed.

However, on Thursday, Williams seemed to downplay the possibility of a rate hike, a point he has consistently stressed in recent weeks as something he does not anticipate. He conveyed a more cautious outlook, suggesting that the current monetary policy stance is sufficiently restrictive to manage inflation. By downplaying the likelihood of rate hikes, Williams aimed to provide reassurance about the Federal Reserve’s current policy direction and its adequacy in achieving inflation goals.

In his speech, Williams highlighted that the economic performance over the past year provides ample evidence that the current monetary policy is restrictive enough to help achieve the Federal Reserve's goals. He pointed to various indicators of economic health and stability, which suggest that the restrictive policy measures in place are effectively contributing to the central bank’s inflation control objectives. This evidence supports his view that the existing policy stance is appropriate for the current economic conditions.

Williams projects that inflation will end the year at 2.5%, which is slightly lower than the current inflation rate of 2.7%, as measured by theFederal Reserve’s preferred inflation gauge, the "core" Personal Consumption Expenditures (PCE) index. This projection reflects his confidence in the continued moderation of inflation, supported by ongoing economic adjustments and policy measures. The expected decline to 2.5% indicates progress towards the Federal Reserve’s long-term inflation target.

A new reading on this gauge for April is expected to be released on Friday. Economists predict that the core PCE will show no change in April, maintaining the 2.7% year-over-year rate observed in March. This upcoming data release will provide further insights into the current inflation trends and the effectiveness of the Federal Reserve’s policy measures. The stability in the core PCE rate suggests a steady but gradual approach to achieving lower inflation.

Williams also noted that the job market remains robust, and wage growth has not yet fully returned to levels consistent with sustaining a 2% inflation rate. He highlighted the strength of the labor market as a positive indicator for the overall economy but acknowledged that wage growth needs to align more closely with the target inflation rate. The interplay between job market dynamics and wage growth is crucial for maintaining long-term price stability.

He forecasts that the unemployment rate will end the year at around 4% and then gradually decrease to 3.75%. Currently, the unemployment rate is at 3.9% and is expected to remain at that level when the May jobs report is released next Friday. These projections indicate a stable labor market outlook, with slight improvements anticipated over time. The expected stability and gradual improvement in unemployment rates contribute to the broader economic context within which the Federal Reserve’s policies are operating.



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