John C Williams: Restoring price stability
Central bank: fed | Type: speech | Date: 2023-11-30

FEDERAL RESERVE BANK of NEW YORK Serving the Second District and the NationSPEECHRestoring Price StabilityNovember 30, 2023John C.

Williams, President and Chief Executive OfficerRemarks at Exploring Innovations in Central Banking, Bretton Woods Committee - New York Fed Joint Conference, Federal Reserve Bank ofNew York, New York CityAs prepared for deliveryIntroductionGood morning, everyone.

Welcome to the New York Fed.

We are so pleased to be co-hosting this conference with the BrettonWoods Committee.My remarks today will focus on the economic picture in the United States, including the monetary policy actions we are taking andmy outlook for the economy.

Before I go further, I need to give the standard Fed disclaimer that the views I express today are minealone and do not necessarily reflect those of the Federal Open Market Committee (FOMC) or others in the Federal ReserveSystem.The Dual MandateThe Federal Reserve has a dual mandate, set by Congress, to achieve maximum employment and price stability.

We are doing wellon the employment side of the mandate.

The unemployment rate has been below 4 percent for the past 21 months.

That's thelongest stretch since the 1960s.

And it's in line with my 3-3/4 percent estimate of the unemployment rate expected to prevail in theeconomy in the longer run.But the imbalances between supply and demand that have persisted since the onset of the pandemic have contributed tounacceptably high inflation.

As measured by the personal consumption expenditures (PCE) price index, inflation surged to a 40-year high of just over 7 percent in June of last year.

Since then, we have seen the inflation rate fall to 3 percent.

This is a significantand welcome decline.

Nonetheless, inflation is still too high.Price stability is the bedrock upon which our economic prosperity stands and is essential to ensure maximum employment overthe long term.

The FOMC is committed to returning inflation to its 2 percent longer-run goal on a sustained basis.The Inflation OnionTo understand why inflation rose so much and why it's moderating, I've been using the metaphor of an onion for the past year."Each layer represents a different sector of the economy.The outermost layer of our inflation onion represents globally traded commodities.

As demand for commodities soared at theonset of the pandemic, inflation surged, then rose again when Russia invaded Ukraine.

By late June of last year, food priceinflation had increased to over 10 percent, and energy price inflation had skyrocketed to over 40 percent.Over the past year, global demand has come into better balance with supply, thanks in part to restrictive monetary policy frommany central banks around the world.

Commodity price inflation has come down significantly.

Food price inflation has dropped toabout 2-1/2 percent-even the cost of a Thanksgiving dinner was cheaper than a year ago." And energy prices have been fallingover the past year, pulling down the overall inflation rate rather than pushing it higher.The onion's second layer is made up of core goods that exclude food and energy.

Here, too, we're seeing the effects of a rebalancingof supply and demand.

And global supply-chain bottlenecks, which triggered widespread shortages of goods during the pandemic,are mostly a thing of the past.

The New York Fed's Global Supply Chain Pressure Index, which measures the extent of supply-chaindisruptions, attained its most favorable reading on record in October, based on data going back to 1998.3As a result of the rebalancing of supply and demand and an easing of supply-chain bottlenecks, core goods inflation is nowrunning around 1/4 of a percent.

And it appears to be on its way to returning to pre-pandemic rates.While the outer layers of our onion have seen the fastest and largest improvements, the inner layer is making progress, too.

Afterpeaking at about 5-3/4 percent earlier this year, core services inflation is now around 4-1/2 percent, and more recent readingspoint to further slowing of inflation in this category.A big driver of the surge in core services inflation has been sharp increases in the price of shelter.

Shelter price inflation wasboosted by strong demand and limited supply during much of the pandemic and in its aftermath.

More recently, rents for newlysigned leases have been increasing at closer to pre-pandemic rates.

As these data are incorporated into the official statistics, theinflation rate for shelter should continue its downward trend.

Inflation for services excluding housing and energy is also beginningto move in the right direction.

Over the past six months, inflation in this category has slowed to about 4 percent, well off the 5-1/4By continuing to use our site, you agree to our Terms of Use and Privacy Statement.

You can P Along with our restrictive policy actions, financial conditions have tightened, driven in part by an increase in longer-term Treasuryyields since the summer.

While statistical models of Treasury yields generally attribute most of the increase to a rise in the termpremium, financial market participants have expressed a wide range of views, with little conviction around any single explanation.The rise in yields and the elevated volatility likely reflect heightened uncertainty about the outlook for the economy and futureinterest rates.Taking into account tighter financial and credit conditions, I expect GDP growth to slow next year to about 1-1/4 percent, and theunemployment rate to rise to around 4-1/4 percent.I expect inflation to continue to move down to our 2 percent longer-run goal.

As I mentioned earlier, slowing shelter price inflationshould help bring the inflation rate down.

And, based on New York Fed research that shows a strong relationship between theGlobal Supply Chain Pressure Index and goods price inflation, I expect to see additional disinflationary pressures on this layer ofthe inflation onion as well.° My forecast is that PCE inflation will be around 3 percent for 2023 as a whole, then decline to around2-1/4 percent next year, before closing in on 2 percent in 2025.All of that said, the future remains highly uncertain, and our decisions will continue to be data dependent.

The risks are two-sided,with the possibility of inflation remaining stubbornly persistent weighed against the risk of a weaker economy and employment.In balancing these risks, and based on what I know now, my assessment is that we are at, or near, the peak level of the target rangeof the federal funds rate.

Based on model estimates of the longer-run neutral interest rate that incorporate forecasts for the currentquarter, the stance of monetary policy is quite restrictive; indeed, it is estimated to be the most restrictive in 25 years." I expect itwill be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2percent longer-run goal on a sustained basis.I will continue to carefully watch the totality of the data to assess whether the current stance of policy is sufficient to achieve ourinflation goal.

If price pressures and imbalances persist more than I expect, additional policy firming may be needed.Before I close, a word on our balance sheet.

At our last meeting, the FOMC said it will continue to reduce its holdings of Treasurysecurities and agency debt and agency mortgage-backed securities, according to the framework announced in 2022.

The strategyand implementation of the reduction in our security holdings is working exactly as designed.® We have so far reduced oursecurities holdings by over $1 trillion, with no signs of adverse effects on market functioning.?Committed to Our GoalSince I first started to unpeel the inflation onion a year ago, we have seen meaningful progress on bringing inflation down andBy continuing to use our site, you agree to our Terms of Use and Privacy Statement.

You can But our work is not nearly done.

I am committed to achieving our 2 percent longer-run inflation goal, creating a strong foundationfor our economic future.1 John C.

Williams, A Bedrock Commitment to Price Stability, remarks at the 2022 U.S. Hispanic Chamber of Commerce National Conference, Phoenix, Arizona, October 3,2022; John C.

Williams, Peeling the Inflation Onion, remarks at the Economic Club of New York (delivered via videoconference), November 28, 2022.

John C.

Williams,Peeling the Inflation Onion, Revisited, The Teller Window, September 29, 2023.2 The American Farm Bureau Federation, "Cost of Thanksgiving Dinner Down Slightly from Record High in 2022," November 15, 2023.3 Federal Reserve Bank of New York, Global Supply Chain Pressure Index.4 Federal Reserve Bank of New York, Consumers' Expectations Largely Stable in October, November 13, 2023.5 Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, November 1, 2023.6 Ozge Akinci, Gianluca Benigno, Ruth Cesar Heymann, Julian di Giovanni, Jan J.

J.

Groen, Lawrence Lin, and Adam I.

Noble, "The Global Supply Side of InflationaryPressures," Federal Reserve Bank of New York Liberty Street Economics, January 28, 2022; and Ozge Akinci, Gianluca Benigno, Hunter L.

Clark, William Cross-Bermingham, and Ethan Nourbash, "How Much Can GSCPI Improvements Help Reduce Inflation?," Federal Reserve Bank of New York Liberty Street Economics, February22, 2023.7 This is based on the Holston, Laubach, and Williams model of the natural rate of interest, using published data through the third quarter of this year and the Blue Chipeconomic forecast for the fourth quarter.8 Board of Governors of the Federal Reserve System, Principles for Reducing the Size of the Federal Reserve's Balance Sheet, January 26, 2022.9 Roberto Perli, Disentangling Messages from the Treasury Market, remarks at 2023 U.S. Treasury Market Conference, Federal Reserve Bank of New York, New York City,November 16, 2023.By continuing to use our site, you agree to our Terms of Use and Privacy Statement.

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