Fedwatching: Williams on the Outlook (Jan 11 2024)

New York Fed President John Williams spoke to an economic development group yesterday about the economic outlook. Here are my takeaways:

  • Williams won't be voting for rate cuts anytime soon. In his view, it won't be appropriate to cut rates until he is "confident that inflation is moving towards 2 percent on a sustained basis."
  • If economic data unfold according to his predictions, inflation will be at 2.25% at the end of this year. In my mind, 2.25% meets the criteria of "moving towards 2 percent on a sustained basis" and in that scenario I could see Williams voting for one cut by the end of the year.
  • Williams had a lot of positive things to say about the current situation. He said things are "looking very good" on employment and the current 3.7% rate is in line with his long-run estimate for the U.S. economy's unemployment rate of 3.75%. I'll note that Williams' view of the general economic situation is sharply at odds with the feeling of malaise that seems to be pervading the general population.
  • Williams has been using a "three layers of an onion" analogy in talking about inflation. His first layer--food, energy, and other commodities--have been falling in price. His second layer, physical goods, has (have?) also fallen in price as supply chain disruptions have healed.
  • He pointed out that his third layer--prices for services--is also "beginning to see significant progress." He pointed to rents not going up as fast as a factor contributing to moderating services inflation.
  • Finally, he cited long-term inflation expectations, the NY Fed's Multivariate Core Trend inflation measure, and trend wage inflation all moving down as positive signs. Despite all this, he said that "it is important to stress that we still have a ways to go to get inflation back to the FOMC’s longer-run goal of 2 percent." Williams isn't ready to hang up the Mission Accomplished banner just yet.
  • One thing I found worrisome in his comments is his prediction of the U.S. economy slowing to 1.25% growth this year. That's quite a sharp slowdown in growth and I'm not sure exactly what kind of dominoes he thinks will fall that would produce a pretty bad number like this. I'll be watching this closely in the coming months.

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