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The "No. 2" figure in the Fed's monetary policy: No need to adjust interest rates in the short term and the task of reducing inflation has not yet been completed

2024-04-12

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On Thursday (April 11) local time, New York Fed President John Williams said that the Federal Reserve has made "tremendous progress" in balancing inflation and employment goals, but policymakers have not yet completed their task.

As president of the New York Fed, Williams also serves as vice chairman of the Federal Open Market Committee (FOMC) and has permanent voting rights like the Fed's governors. In terms of monetary policy, his voice is second only to Chairman Powell. Before becoming president of the New York Fed, Williams also served as president of the San Francisco Fed for nearly seven years.

"The economy has made great strides toward a better balance and a 2 percent inflation target, but it has not yet seen us achieve our dual mandate," Williams said in a speech at the Federal Home Loan Bank members seminar. achieve the goal at the same time.”

Many Fed officials have used similar words before. Given that the employment situation reflected in U.S. data remains solid, inflation is obviously a bigger problem facing the central bank.

Williams said he still expects inflation to gradually return to 2%, but also acknowledged that there will be "back and forth" phenomena, like the inflation data released the previous day.

The U.S. CPI in March, released on Wednesday, rose 0.4% month-on-month and 3.5% year-on-year. After excluding volatile food and energy prices, core CPI rose 0.4% month-on-month and 3.8% year-on-year. All four figures were higher than market expectations. 0.1 percentage points.

Among them, the overall inflation rate of 3.5% is the highest level since September last year, further indicating that the rebound in inflation since the beginning of the year is not a temporary phenomenon, and the Fed's progress in curbing inflation may be stalling.

Some market participants also reduced their expectations for the bank to cut interest rates from three to two, with each rate cut by 25 basis points during the year. Williams said the economic outlook is uncertain and the Fed must rely on data. He also pointed out that there is no need to change monetary policy in the short term and will evaluate confidence in cutting interest rates after seeing more data.

When it comes to the labor market, Williams said he has seen signs of "normalization," with many indicators returning to pre-pandemic levels from the fiery state they had just out of the epidemic. He predicts that the U.S. unemployment rate will peak at 4% this year and then gradually decline.

Williams said that if the U.S. economy develops as predicted by the March FOMC economic forecast, then "it would make sense to gradually remove the restrictions on monetary policy" during this year. Referring to quantitative tightening (QT), he said the committee's decision to slow down the pace of balance sheet reduction would allow officials to better monitor market conditions.

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The "No. 2" figure in the Fed's monetary policy: No need to adjust interest rates in the short term and the task of reducing inflation has not yet been completed

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