In remarks at Binghamton University on October 10, New York Fed President John Williams spoke about how the imbalances in the economy and labor market have dissipated and how inflation is moving sustainably toward 2 percent. He also discussed the decision by the Federal Open Market Committee (FOMC) to move the stance of monetary policy toward a more neutral setting. And he gave his economic outlook.
He said:
“The economy has been on a remarkable journey. In two years, the red-hot labor market has normalized, and inflation has come within striking distance of our 2 percent longer-run goal—all while employment and the economy continue to grow.”
“In light of the progress we have seen in reducing inflation and restoring balance to the economy, the FOMC decided at its most recent meeting to lower the interest rate that it sets. Simply put, this action will help maintain the strength of the economy and labor market while inflation moves back to 2 percent on a sustainable basis.”
“Looking ahead, based on my current forecast for the economy, I expect that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time.”
In his speech, President Williams discussed how the Fed is working to achieve its dual mandate of maximum employment and price stability. The Fed defines price stability as 2 percent inflation over the longer run, as measured by the personal consumption expenditures (PCE) price index. And President Williams used his analogy of an onion to demonstrate how three distinct layers of inflation, which surged after the onset of the pandemic, are normalizing at different rates.
In the onion’s outer layer, which represents globally traded commodities, prices have been generally flat or falling. In the middle layer, which represents core goods excluding commodities, inflation has returned to pre-pandemic levels. The inner layer, core services, has taken the longest to normalize, but “the disinflationary process is well underway here too,” according to President Williams.
On the employment side of the mandate, “A wide range of metrics—including the unemployment rate; measures of job openings, hiring, quits, and employment flows; and perceptions of job and worker availability—indicate that the very tight labor market of the past few years has now returned to more normal conditions and is unlikely to be a source of inflationary pressures going forward,” he said.
The FOMC “instituted and maintained a very restrictive monetary policy stance until the data gave us confidence that inflation is sustainably on course to 2 percent,” President Williams said. “With this progress toward achieving price stability, moving toward a more neutral monetary policy stance will help maintain the strength of the economy and labor market.”
With monetary policy moving to a more neutral setting over time, President Williams said he expects:
- Real GDP to grow between 2-1/4 and 2-1/2 percent this year and to average about 2-1/4 percent over the next two years.
- The unemployment rate to edge up from its current level of about 4 percent to around 4-1/4 percent at the end of this year and stay around that level next year.
- And overall PCE inflation to be around 2-1/4 percent this year, and to be close to 2 percent next year.
Judy DeHaven is an executive communications specialist at the New York Fed.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
