John C Williams: Restoring balance
Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of
the Federal Reserve Bank of New York, at New Jersey City University, 18 February 2022.
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As prepared for delivery
Good morning, everyone. I want to thank Sue Henderson for that kind introduction, and New
Jersey City University for hosting today's discussion. I always enjoy speaking with students, and I
look forward to the time-hopefully soon-when we can have these types of events in person.
Today, our virtual setting is Jersey City, one of the most diverse cities in the world-and one
known for terrific pizza. Now, it's not my place to get into the debate over who has the best pizza,
and I know that people have strong views on that subject. As president of the New York Fed, I
proudly represent both sides of the Hudson River, and my job is to make the economy stronger
and the financial system more stable for all.
Before I move on from the topic of pizza to economics, I should give the standard Fed disclaimer
that the views I express today are mine alone. They do not necessarily reflect those of the
Federal Open Market Committee-what we call the "FOMC"-or others in the Federal Reserve
System.
As you well know, the economy-like many facets of our lives-continues to be shaped by the
unpredictable nature of the coronavirus. As I've said before, the pandemic is first and foremost a
health crisis. While omicron was milder for many-and thankfully the wave subsided relatively
quickly-it still caused terrible hardship for countless families.
You can see the economic effects of the pandemic right here in New Jersey. What struck me
this week as I met with New Jersey business, community, and political leaders was the different
ways that COVID-19 affects local economies. Just a few miles from Jersey City, Port Newark
and Port Elizabeth are humming with activity. But across the Turnpike, Newark Liberty
International Airport has seen a big reduction in the number of flights and passengers relative to
pre-pandemic trends. Likewise, the pandemic has led to empty office buildings and fewer
travelers in New York City, which affects businesses here in New Jersey as well.
Today I'm going to talk about how the economy has continued to recover despite the many
disruptions and imbalances that COVID-19 has caused. I'll also discuss the labor market and the
rise in inflation. Then, I'll describe how the Federal Reserve's monetary policy is working to help
restore balance and stability to the economy during these uncertain times.
Economic Outlook
Since it's the Friday before a holiday weekend, I won't test any of you on the functions of the
Federal Reserve System. But I do want to take a moment to discuss the Fed's dual mandate of
promoting maximum employment and price stability. U.S. monetary policy is set by the FOMC,
which is made up of the Board of Governors and five of the 12 presidents of the Federal Reserve
Banks.
We make our decisions after studying the data-lots of data. We look at everything from food
and gas prices to retail sales and inventories, from labor costs and employment figures to
semiconductor inventories and shipping expenses, and from the demand for goods and services
to readings on public health.
And we consider more than just numbers on spreadsheets and charts. We also regularly hear
from business and community leaders who tell us firsthand what is happening in the economy.
This occurs both through regular meetings with our Boards of Directors and advisory groups, as
well as in ongoing discussions with local leaders. That is why it's so important for me to make
trips like this one-even virtually-so I can meet with leaders to hear their perspectives. For
example, earlier today I spoke with officials at the Port Newark-Elizabeth Marine Terminal about
supply chains and logistics. And yesterday, I met with groups in North Jersey who are working to
bridge the gap in health outcomes and housing-two critically important issues that can affect
economic mobility.
Despite the disruptions from COVID-19, the overall economy has shown remarkable strength
and resilience over the past year. To put this in perspective, the onset of the pandemic in 2020
caused the sharpest U.S. economic contraction since World War II. Since then, we have seen a
remarkable turnaround. The economy, measured by real gross domestic product, or GDP, grew
about 5-1/2 percent over the course of last year, the fastest pace of growth since 1984. To get an
idea how long ago that was, 1984 was the year I finished college.
The labor market has also improved dramatically and is now very strong. Over the past 12
months through January, the economy added over 6-1/2 million jobs. The unemployment rate
has fallen from the pandemic peak of 14.7 percent to just 4 percent today. In fact, there are many
more job openings now than there are people looking for work. Another clear sign of the hot labor
market is that wages rose sharply last year, especially for lower-paid jobs.
Inflation
I mentioned earlier that the Federal Reserve has two goals: maximum employment and price
stability. The very strong labor market is great news in terms of achieving maximum
employment. However, we have seen inflation rise to a level that's far too high. Ten years ago,
the FOMC set a longer-run goal of 2 percent inflation-that is, prices rising 2 percent per year on
1
average. From 2012 through 2020, inflation averaged below this 2 percent goal. But the inflation
rate started rising sharply in 2021. The Fed's preferred price measure, the personal consumption
expenditures (PCE) price index, rose 5-3/4 percent last year, its highest reading since the early
1980s.
This sudden, sharp rise in prices reflects a unique set of circumstances that has driven supply
and demand out of balance. For those of you who have studied economics, you will not be
surprised that I ascribe this rise in inflation to demand outpacing supply. But, the rapidly changing
situation of the past two years has been extraordinary, and it is worth discussing in some detail.
After the onset of the pandemic, Americans shifted their spending from services to goods,
spending less on restaurants, vacations, and entertainment, and more on things like cars,
appliances, and furniture. As businesses tried to meet the surge in demand for goods,
distribution channels backed up. Supply-chain bottlenecks and shortages emerged, both here
and abroad. Too many ships arrived at the ports-particularly those in California. When the ships
were finally able to dock, there weren't enough workers and drivers to unload and transport
goods to stores-or to people's homes.
In addition, we have seen a large pullback in the number of people willing and able to work, in part
reflecting the challenges and risks of working during the pandemic. Some businesses can't hire
people fast enough to help meet the strong demand. This has contributed to an acceleration in
wages and higher prices for a variety of goods and services, including food and housing. High
inflation is hardest on those already struggling to make ends meet.
The Fed's Response
This brings me to the outlook for the economy and monetary policy. As I said earlier, demand for
goods and some services is now far outstripping supply, resulting in elevated inflation. With the
labor market already very strong, it's important to restore the balance between supply and
demand and bring inflation down. A number of factors should help accomplish this rebalancing,
and monetary policy has an important role to play.
First, with the omicron wave now ebbing and COVID vaccines and treatments much more widely
available across the globe, we should see a gradual restoration of supply and a resolution of
associated bottlenecks and shortages. Over time, consumers should also start to cut back on
buying goods that are in short supply and switch back to in-person activities like travel, dining,
and entertainment, where supply is less constrained overall. Together, these developments
should contribute to more balance between supply and demand in the economy.
The second factor is fiscal policy, which provided a huge boost to the economy during the past
two years but is unlikely to be as significant a source of demand this year. This is true not only for
the United States, but also for many other economies.
Last-but definitely not least-is monetary policy. After providing maximum support to the
economy for the first year and half of the pandemic, the FOMC is adjusting the stance of
monetary policy with the aim of bringing demand in balance with supply and thereby bringing
down inflationary pressures. The same is true for many other central banks, which either already
have moved in this direction or are expected to this year.
The initial step in that process was the FOMC's decisions to first reduce, and then end, its net
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purchases of Treasury and mortgage-backed securities. These purchases pushed longer-term
interest rates lower, making it less costly for consumers and businesses to borrow, and
contributed to favorable overall financial conditions that supported spending.
The next step will be to raise the FOMC's target range for the federal funds rate the short-term
interest rate at which banks lend to each other. In March 2020, the FOMC reduced the target
range for the federal funds rate by 1-1/2 percentage points to near zero. This very low interest
rate contributed to the sharp rebound in demand, which propelled the strong labor market
recovery over the past year.
But with today's strong economy and inflation that is well above our 2 percent longer-run goal, it
is time to start the process of steadily moving the target range back to more normal levels. In
particular, I expect it will be appropriate to raise the target range at our upcoming meeting in
March.
Once the interest rate increases are underway, the next step will be to start the process of
steadily and predictably reducing our holdings of Treasury and mortgage-based securities, which
had grown significantly as a result of the purchases that began in March 2020. Last month, the
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FOMC released a set of principles that will guide that process. Assuming the economy
develops roughly as I expect, I foresee this process getting started later this year.
Taken together, these two sets of actions steadily raising the target range for the federal funds
rate and steadily bringing down our securities holdings-should help bring demand closer to
supply. In fact, even though we haven't done either of these things yet, financial conditions have
already responded based on the expectation of Fed action. For example, medium- and
longerterm Treasury yields and fixed-rate mortgage rates have risen close to their December 2019
levels. Of course, our actions will be driven by the data and a determination to achieve our
maximum employment and price stability goals.
With these three factors working together to restore balance between supply and demand, I am
confident we will achieve a sustained, strong economy and inflation at our 2 percent longer-run
goal. For this year, I look forward to continued growth and receding inflation, both for the nation
and North Jersey. Specifically, my forecast for the U.S. economy is for real GDP to grow a bit
below 3 percent this year, for the unemployment rate to end the year around 3-1/2 percent, and
for PCE price inflationto drop back to around 3 percent, before falling further next year as supply
issues continue to recede.
Conclusion
Since the onset of the pandemic two years ago, this has an extraordinary time for the economy
and monetary policy. As we work to help restore balance to the economy and bring down
inflation, our actions will always be driven by the data, and we will remain focused on achieving
maximum employment and price stability.
1
Board of Governors of the Federal Reserve System, Statement on Longer-Run Goals and Monetary Policy
Strategy, as adopted effective January 24, 2012.
2
See Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, November
3, 2021; Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement,
December 15, 2021; and Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC
Statement, January 26, 2022.
3
Board of Governors of the Federal Reserve System, Principles for Reducing the Size of the Federal Reserve's
Balance Sheet, January 26, 2022.