New York Fed President Expects Modest Growth This Year Despite Inflation Concerns

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New York Fed President Expects Modest Growth This Year Despite Inflation Concerns

The Federal Reserve Bank of New York President, John Williams, has commented on recent economic data and the state of inflation in the US economy. Speaking at a gathering held by the Money Marketeers of New York University, Williams noted that recent economic data showed that both inflation and the labor market are cooling, which if sustained, could help bring down inflation.

Williams said he expects inflation, as measured by the personal consumption expenditure price index, to decline from 5% in February to about 3.25% this year, and to ease to the Fed’s long-term 2% target over the next two years. He also expects the unemployment rate to rise to a range of 4%-4.5% next year from 3.5% in March.

However, Williams emphasized that inflation is still too high and that the central bank will use its monetary policy tools to restore price stability. He did not comment on his personal view of what’s next for monetary policy, but he noted that the central bank forecasts released recently flagged the prospect of more monetary policy tightening to help lower inflation.

The Fed has already raised its short-term rate target aggressively over the last year, and at its late March meeting, it increased its rate target by 25 basis points to between 4.75% and 5%. It is widely expected to increase that rate by another quarter percentage point at its early May meeting and hold rates there for the remainder of the year.

Williams also discussed recent stress in the banking sector, noting that it will likely weigh on economic activity. He said that the banking sector stress that started last month and has resulted in extensive Fed emergency lending to banks seems to be cooling off. While conditions in the banking sector have stabilized, Williams cautioned that the troubles will likely make credit more expensive and harder to get, which will in turn depress growth.

“It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy,” Williams said.

Williams noted that the large levels of emergency bank borrowing from the Fed, which stood at $323 billion via three programs as of a week ago, are not an issue and the Fed is happy banks are seeking liquidity if they need it. He also said that it would be likely this borrowing declines as banking sector conditions further stabilize.

The Fed’s staff had previously predicted a recession starting later this year, but Williams stated that he does not expect a recession. He said data from the first quarter showed the economy was growing at a “solid pace.” He expects real GDP to grow modestly this year, in contrast to Fed staff predictions.

Overall, Williams’ comments reflect the Federal Reserve’s cautious stance on monetary policy and the state of the economy. While recent data has shown some positive signs, such as cooling inflation and a tight labor market, the central bank remains committed to lowering inflation to its long-term 2% target. The banking sector stress is also a concern, and Williams will be closely monitoring the impact on the economy.

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