Fed can cool inflation this year and economic growth will continue, Williams says

The Federal Reserve may cut inflation while maintaining a strong economy this year, said New York Fed Chairman John Williams.

“Although the task is difficult, it is not insurmountable. We have the tools to restore balance to the economy and restore price stability, and we are committed to using them, “Williams said in a speech at an economic conference in Germany.

The Fed has already raised its benchmark interest rate to a range of 0.75% -1%, and Williams said the central bank will act quickly to return that rate to “more normal levels” this year.

Fed Chairman Jerome Powell has already indicated that the central bank intends to increase its policy rate by 1 percentage point over the next two meetings, bringing the Fed’s fund rate to a range of 1.75% -2%.

In comments to reporters after his speech, Williams endorsed that plan.

At the same time, the Fed is beginning to reduce the size of its $ 9 trillion holdings in Treasury bonds and mortgage-backed securities.

“Our monetary policy actions will cool the demand side of the equation,” Williams said.

New York Fed Chairman says he expects core inflation, as measured by the Fed’s favorite personal consumption spending price index, to cool to nearly 4% this year, from 5.2 % in March, before falling around 2.5% in 2023.

At the same time, the labor market and the economy will continue to show “strength and resilience,” he said.

In 2022, Williams expects GDP growth to be around 2%, he said, below a rate of 5.7% last year, but still close to his recent trend. The unemployment rate should remain “around its current low level” of 3.6%, he added.

The Fed’s monetary policy tools are especially powerful on housing and durable goods, the same sectors that are seeing the biggest imbalances and signs of overheating, he said.

The “case study” for the high demand for durable goods is the auto industry, where supply shortages have led to historically low inventories, Williams said.

“It’s a vendor market and prices have skyrocketed,” Williams said.

Higher interest rates will cool demand in these rate-sensitive sectors at levels more in line with supply. This will reduce the heat in the labor market, reducing the imbalance between job offers and available labor supply.

On Tuesday, Richmond Fed Chairman Tom Barkin also downplayed the risk of a major recession.

The Dow Jones Industrial Average DJIA,
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opened a strong Tuesday after a strong liquidation over the past three days. The performance of the 10-year Treasury note TMUBMUSD10Y,
fell just below 3% in volatile trading.

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