In remarks at the Macroeconometric Caribbean Conference on March 21, New York Fed President John C. Williams discussed the economy and monetary policy in the context of a changing and uncertain landscape. He also talked about global inflationary trends, inflation expectations, and how the Federal Reserve is working to achieve its dual mandate of maximum employment and price stability.
He said:
“Uncertainty is high, and there are many scenarios that could play out, depending on fiscal and trade policies and geopolitical and other developments.”
“In these circumstances, it will be important to take a holistic view in monitoring and assessing all available information. It is also fitting to take a risk management perspective in assessing the economic outlook, in evaluating the appropriate stance of monetary policy, and in making policy decisions.”
“Whatever the economy has in store for us, I am committed to supporting maximum employment and returning inflation to our 2 percent objective.”
In his remarks, President Williams said that “the economy entered the new year on firm footing.” He said GDP and job growth have been solid, a wide range of labor market indicators have stabilized, and inflation has “continued on a bumpy path” toward the Federal Open Market Committee’s 2 percent longer-run goal.
But he added that recent data—both hard and soft—are sending mixed signals about the future.
Economists at the New York Fed have developed a statistical model, called Global Multivariate Core Trend Inflation (Global MCT), to measure and better understand the behavior of the persistent components of global inflation. In its analysis, among many findings, Global MCT uncovers very strong common components of inflation, with global factors explaining an overwhelming share of the persistent movements in inflation rates across six of the economies used in the sample, President Williams said.
“These empirical analyses illustrate how monetary policy spills over and spills back to domestic and international rates of inflation,” he said. “In the United States, as in other countries, monetary policy decisions are based on domestic mandates. But as policymakers, we also understand that our decisions can affect global economic and financial conditions, and in turn can spill back onto our shores.”
In discussing the important role of inflation expectations, President Williams said over the past two months, “we have seen clear signs of a broad-based increase in short-term inflation expectations.” This includes market-based measures of inflation, as well as the New York Fed’s business surveys and Survey of Consumer Expectations. But he added that “most indicators point to continued well-anchored medium- and longer-term expectations.”
An analysis of inflation expectations shows that while “inflation shocks are expected to have persistent effects on inflation, these effects are anticipated to largely dissipate after five years,” he said. “Importantly, there are no signs of inflation expectations becoming unmoored relative to the pre-pandemic period.”
With regard to the U.S. economic outlook, President Williams said he expects GDP growth this year “to step down from last year’s pace in part because of a slowdown in labor force growth due to lower immigration rates. But it’s hard to know with any precision how the economy will evolve.”
He added that in the FOMC’s most recent Summary of Economic Projections, the central tendency of projections for GDP growth this year was between about 1-1/2 and 2 percent, and for inflation, between about 2-1/2 and 3 percent. “Any of these outcomes—or even some others outside these ranges—seem completely plausible to me,” he said. “In addition, it is currently hard to assign probabilities to these scenarios.”
“There is certain uncertainty in monetary policy,” he said. “The current modestly restrictive stance of monetary policy is entirely appropriate given the solid labor market and inflation still running somewhat above our 2 percent goal. It also positions us well to adjust to changing circumstances that affect the achievement of our dual mandate goals.”
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.
