John C Williams: Reading the recovery
Remarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of
the Federal Reserve Bank of New York, at the Council on Foreign Relations, 14 January 2022.
* * *
As prepared for delivery
Good morning, everyone, and Happy New Year. Thank you, Charles, for that introduction. And
thanks to Richard Haass for the opportunity to speak with the members of the Council on Foreign
Relations once again.
For the past two years, I've begun my remarks by saying how much I wish we could meet
together in person. This time, I really was hoping for a chance to rewrite the script. After seeing
so much progress on vaccinations over the past year and a moderation in COVID-19 infections
during the fall, just a short time ago many of us had expected that we'd soon be turning the page.
The story of the pandemic is a complicated one. It is writing itself as we live it, and the storyline
has been far from predictable. This is, first and foremost, a health crisis. The unusual and
extraordinary nature of the situation means that circumstances are constantly evolving.
For the economy, this has meant that what we've experienced is unlike any recession or
recovery we've seen-or read about-in the past. While there have been significant
improvements in the overall economy, setbacks persist in some areas, and new challenges have
appeared.
I'll always take an opportunity to quote something from the Lord of the Rings canon, so I'll
continue with the story analogy and say that for many people, these past few weeks have felt like
we've been "There and Back Again."
We again find ourselves in a period of extraordinary difficulty. The emergence and rapid spread
of the Omicron variant in the United States and around the world are resulting in new peaks of
COVID infections and hospitalizations, as well as severe strains on the healthcare and essential
services workforce. This is a reminder that the path of economic recovery continues to be driven
by the course of the virus.
In my remarks this morning, I'll share more about what we're seeing in the incoming data and
how it relates to the economic picture in the United States and the world more broadly. I'll also
highlight the significant progress we've seen in the labor market and my outlook for inflation.
Finally, I'll discuss the Federal Reserve's recent policy actions and what they mean for the future.
Before I proceed, I need to give the standard Fed disclaimer that the views I express today are
mine alone and do not necessarily reflect those of the Federal Open Market Committee (FOMC)
or others in the Federal Reserve System.
Economic Outlook
When I look at the economy, it is through the lens of the Federal Reserve's "dual mandate."
These are two goals set by Congress: maximum employment and price stability. Given these
goals, my focus is to study and understand the wide range of developments that affect
employment, unemployment, and inflation as they play out in real time.
As we start a new year, it's worth highlighting the key economic developments of last year, which
were defined by a very strong recovery, both here and abroad. Although we don't have all the
data yet, I expect that U.S. inflation-adjusted, or real, gross domestic product (GDP) increased by
about 5-1/2 percent last year, which would be the strongest growth rate between fourth quarters
in over 35 years.
The economic snap-back here and abroad has led to global supply-chain bottlenecks and
imbalances between supply and demand that have contributed to a sharp rise in inflation. Inflation
in the United States, based on the personal consumption expenditures price index, will likely
exceed 5 percent in 2021, and inflation rates are elevated in many other countries, too.
Looking ahead, I expect the current Omicron wave to slow growth in the next few months as
people once again pull back from contact-intensive activities. I also expect that the Omicron
wave will temporarily prolong and intensify labor supply challenges and supply-chain bottlenecks
that we have been experiencing. Current staffing challenges for essential service workers in the
healthcare, transportation, and education sectors will likely have a ripple effect too. But, once the
Omicron wave subsides, the economy should return to a solid growth trajectory and these
supply constraints on the economy should ebb over time.
Considering the effects of Omicron on the economy in the first part of the year, I expect real GDP
to increase around 3-1⁄2 percent this year. While this is not quite the blockbuster growth we saw
in 2021, it is still well above its long-run trend and supportive of continued improvement in the
labor market. Of course, experience has taught us not to be overly confident in predictions about
COVID and its effects on the economy, and uncertainty around the economic outlook remains
high.
The Labor Market
Now I'll turn to the employment side of our mandate, where the picture improved dramatically
over the past year. About 6-1/2 million jobs were added last year, and the unemployment rate
plummeted by 2.8 percentage points. In fact, with the unemployment rate now at 3.9 percent, we
have retraced 96 percent of the COVID recession rise in less than two years. This is lightyears
faster than the more than seven years it took for unemployment to retrace to the same degree
after the global financial crisis. With the economy registering solid growth, I expect the
unemployment rate will continue to come down further to 3-1⁄2 percent this year.
The strength in the labor market is seen in a wide variety of indicators, including job openings,
quits, and wage growth. The labor market has been especially robust in recent months for
workers at the bottom of the wage distribution. And female labor force participation and
employment have improved, especially for women with young children.
Inflation and Supply-Chain Challenges
One of the foremost concerns surrounding the outlook is inflation, which rose considerably last
year.
There are two main contributors to the current high inflation: very strong demand, especially for
goods, and supply bottlenecks. Both have been prevalent throughout the pandemic. The
shutdown of factories-particularly those in Asia-and widespread lockdowns led to disruptions
to logistics networks, elevated shipping costs, and prolonged delivery times. A new index created
by New York Fed research staff shows that global supply-chain pressures shot up last year,
1
reaching historically high levels.
These challenges are not just top of mind for companies selling their goods or consumers
waiting for their purchases to be delivered. Elevated prices have real life consequences for so
many, particularly for people who are struggling to cover the rising costs of food, housing, and
transportation.
The circumstances we are facing today are unlike anything we've experienced in the past.
Typical historical episodes cannot be used as reference points for current conditions. As an
example, the very large increases in prices that we see today are primarily for durable goods.
This is a striking turnaround from the past 25 years when those prices had been trending lower.
In contrast, even with the recent increases, prices on services and non-durable goods are now
fairly close to their longer-run trends. And, even though the Omicron wave is posing new
obstacles, some supply issues are starting to work themselves out as the economy adjusts to
the changing circumstances.
Just as the pandemic has followed its own script, I anticipate that the dynamics of inflation will
also be different than previous cycles. With growth slowing and supply constraints gradually
being resolved, I expect inflation to drop to around 2-1/2 percent this year, much closer to the
FOMC's 2 percent longer-run goal. And looking further ahead, I expect inflation to get close to 2
percent in 2023.
Policy Actions
These developments in the labor market and for inflation inform the Federal Reserve's policy
response and recent actions. In its December 2021 statement, the FOMC said that it would keep
2
the target range for the federal funds rate at 0 to 1⁄4 percent. With inflation having exceeded 2
percent for some time, the FOMC said it expects it will be appropriate to maintain this target
range until labor market conditions have reached levels consistent with the FOMC's
assessments of maximum employment.
Because of inflation developments and the notable improvement in the labor market, the FOMC
also decided to reduce the monthly pace of its net asset purchases.
With our actions, we have started the process of adjusting the stance of monetary policy away
from one of providing maximum support for the economy. This movement in policy reflects the
gains the economy has made since the beginning of the pandemic and the evolution of the risks
to the achievement of our goals.
The next step in reducing monetary accommodation to the economy will be to gradually bring the
target range for the federal funds rate from its current very-low level back to more normal levels.
Given the clear signs of a very strong labor market, we are approaching a decision to get that
process underway. The timing of such decisions will be based on a careful consideration of a
wide range of data and information, with a clear eye on our maximum employment and price
stability goals.
Conclusion
As we turn a page on the new year, it's clear that we have not yet reached the end of this
pandemic story. But despite the challenges, I am hopeful of a continued strong recovery this
year.
1
Gianluca Benigno, Julian di Giovanni, Jan J. J. Groen, and Adam I. Noble, A New Barometer of Global Supply
Chain Pressures, Federal Reserve Bank of New York Liberty Street Economics, January 4, 2022.
2
Board of Governors of the Federal Reserve System, Federal Reserve Issues FOMC Statement, December 15,
2021.