Written by Michael S. Derby
NEW YORK, March 30 (Reuters) – Federal Reserve Bank of New York President John Williams said on Monday that the current state of monetary policy is in a good position to deal with a number of problems that may herald a near-term inflation.
“This is an unusual situation,” Williams said in a transcript of prepared remarks ahead of an event hosted by the Staten Island Economic Development Corporation. “But the current level of monetary policy is well-positioned to balance the risks of our higher activity and price stability goals.”
Williams said in his remarks that the war in the Middle East “could cause a major supply shock with effects that raise the price at the same time – with a rise in average costs and commodity prices – and reduce economic activity,” and added “this has already started to play out.” He added that there are also emerging signs of supply disruption.
Although uncertainty about the inflation outlook is “high,” Williams said “the significant increase in energy prices resulting from developments in the Middle East is likely to increase overall inflation in the coming months.” That said, some of that should return later in the year if oil prices fall after the war ends.
Williams, who also serves as the vice chairman of the Federal Open Market Committee that sets interest rates, did not suggest the need for a near-term change in monetary policy.
Uncertainty of war
The war, which began with the joint US-Israeli attacks on Iran, has caused notable challenges for the Fed, with an immediate economic impact felt in the form of large gains in energy prices, since Iran has blocked shipping through the Strait of Hormuz.
The price pressure threatens to raise inflation rates, all of which equals the Fed would like to watch as long as it does not start to bleed into price pressures and long-term inflation expectations. Energy prices are also likely to put downward pressure on growth as consumer prices face higher energy costs.
That has put the Fed in a difficult and complex position for officials to provide clear signals about what lies ahead for monetary policy. Earlier on Monday, Federal Reserve Chairman Jerome Powell said that the current economic situation requires caution on the part of the central bank.
“We are facing events in the Middle East that will certainly affect the price of gas, and we feel that our policy is in a good place to wait and see how that will happen,” Powell said as part of the event held in Cambridge, Massachusetts. “There’s downside risk to the labor market, which suggests keeping rates low, but there’s downside risk to inflation, which suggests maybe not keeping rates low,” he said.
Financial markets have been eyeing the possibility of a rate cut by the Fed this year, although recently, investors were also considering the prospect of a rate hike, given that war-torn economies are coming on top of inflation already above the Fed’s 2% target.
At its policy meeting earlier this month, the Fed kept its target for the federal funds rate between 3.5% and 3.75% while penciling in one rate sometime through 2026.
In his words, Williams said that he expects growth to reach 2.5% this year and inflation to reach 2.75% before returning to the 2% target next year. He also said that he sees unemployment levels decreasing this year and next.
Williams’ outlook on inflation and employment appears more optimistic than most of his Fed colleagues, who expect the unemployment rate to remain steady at the current 4.4% until the end of the year and who see it taking until 2028 before inflation reaches the 2% target.
(Reporting by Michael S. Derby and Ann Saphir; Editing by Andrea Ricci)
#Feds #Williams #Policy #wellpositioned #unusual #conditions