In remarks at a conference celebrating the centennial of the Central Bank of Chile on November 21, New York Fed President John C. Williams discussed the importance of inflation targeting in helping central banks achieve price stability and better economic outcomes, particularly after the onset of the COVID-19 pandemic. He also gave his views on inflation, employment, and monetary policy in the United States.
He said:
“It is not possible to measure the effects of trade policy actions on inflation with precision. My estimate is that increased tariffs have contributed about one half to three quarters of a percentage point to the current inflation rate.”
“Looking ahead, it is imperative to restore inflation to our 2 percent longer-run goal on a sustained basis. It is equally important to do so without creating undue risks to our maximum employment goal.”
“I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.”
President Williams kicked off his remarks by discussing three principles of inflation targeting: independence and accountability, transparency and the clear communication of an inflation target, and well-anchored inflation expectations, gained from the credibility that central banks build over time.
He said that inflation targeting “is both an important part of Chile’s central banking history and a core foundation of successful monetary policy,” noting that Chile was among the first central banks to adopt the strategy.
Inflation targeting contributed to a prolonged period of price stability in many countries through 2020. “But it wasn’t until the onset of the COVID-19 pandemic that [inflation targeting regimes] were truly put to the test,” President Williams said.
After inflation began to surge around the world in 2021, central banks leaned into their inflation targeting strategies to bring inflation down.
“Following central banks’ actions, inflation declined across the board, and economies weathered the disinflation much better than anticipated,” President Williams said. “And despite big movements in interest rates across countries, disinflation occurred without dramatic disruptions to capital flows, exchange rates, or financial markets. It’s a true testament to the success of inflation targeting.”
President Williams also discussed the current economic situation in the United States and the risks to the Fed’s dual mandate of maximum employment and price stability, defined as 2 percent inflation over the longer run.
With regard to employment, he said that “indicators of the balance between labor demand and supply, including the unemployment rate, have gradually softened over the past year, reaching levels seen prior to the pandemic when the labor market was not overheated.”
“I would emphasize that this has been an ongoing, gradual process, without signs of a significant rise in layoffs or other indications of a sharp deterioration in the labor market,” he said.
On the price stability side of the mandate, inflation has fallen to about 2-3/4 percent after peaking at 7-1/4 percent in mid-2022. But because of the effects of trade policies and other developments, “progress toward our 2 percent goal has temporarily stalled,” President Williams said. However, he said that he does not see “any signs of tariffs contributing to second-round or other spillover effects on inflation.”
“In particular, inflation expectations are very well anchored, no broad-based supply chain bottlenecks have emerged, labor markets are not creating inflationary pressures, and wage growth has moderated,” he said. “As a result, I expect the effects of tariffs on inflation will play out over the rest of this year and the first half of next year. Inflation should thereafter get back on track to 2 percent in 2027.”
President Williams said monetary policy is “very focused on balancing the downside risks to our maximum employment goal and the upside risks to price stability. My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat.”
Looking ahead, President Williams said his “policy views will, as always, be based on the evolution of the totality of the data, the economic outlook, and the balance of risks to the achievement of our maximum employment and price stability 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.
