New York Federal Reserve President John Williams said U.S. interest rates will likely need to stay high “for some time” until senior central bank officials are confident the rate of inflation is returning to 2%.
Williams made his remarks Tuesday at a speech in White Plains, N.Y. He is seen as a close ally of Fed Chairman Jerome Powell, so his words carry a lot of weight in financial markets.
The New York Fed chief pointed to major progress in slowing the rate of inflation. The consumer price index, for example, has decelerated to an annual rate of 3.1% from a 40-year peak of 9.1% in mid-2022.
Williams said he expects inflation to slow to 2.25% by year’s end and reach the Fed’s 2% goal by 2025. Before the pandemic, U.S. inflation rose slightly less than 2% a year.
Williams said the labor market would need to soften a bit more, potentially bumping up the unemployment rate to 4% from the current level of 3.7%.
The Fed jacked up a key short-term U.S. interest rate to a top end of 5.25% last summer, from near zero in the spring of 2022, to tame inflation.
Financial markets expect the Fed to begin cutting rates as soon as March, but Williams and other senior officials have been pushing back on that idea.
Williams cautioned the Fed has to remain vigilant, saying, “It is
important to stress that we still have a ways to go to get inflation back to” the long-term target.
Williams described inflation as three layers of an onion.
The first layer, commodity prices, have largely returned to normal. He pointed to a decline in energy prices and much slower food inflation.
Inflation in the second layer, the cost of goods, has dropped to near zero, Williams noted. These are items such as clothes, appliances and consumer electronics.
The third layer, service prices, is where inflation has been most stubborn, but Williams noted that service inflation is also on the wane.
“We’re beginning to see significant progress in the third, innermost layer of the onion, too,” Williams said
The biggest parts of service inflation are rent and wages. Rents are starting to decline in much of the country, Williams noted, while wage growth has also slowed.
“The data indicate that we are clearly moving in the right direction,” he said. “However, we still are a ways from our price stability goal.”
