New York Fed chief defends central bank’s handling of inflation crisis

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John C. Williams. Contributing photo.

John C. Williams, Chairman and CEO, defended the Federal Reserve’s response to the historically high inflation rates weighing on the country, saying the central bank is using monetary policy correctly to regain control of the economy. difficult economy.

Speaking May 10 at the NABE/Bundesbank International Economic Symposium in Germany, Williams identified the Federal Reserve’s “dual mandate of price stability and maximum employment.” Although the task is difficult, it is not insurmountable. We have the tools to restore balance to the economy and restore price stability, and we are committed to using them.

Williams noted that inflation “has risen rapidly and dramatically to levels last seen in the early 1980s – a year ago headline inflation, as measured by the percentage change in the personal consumption expenditure price index, was 2.5%, in March it was 6.6%.

Williams identified what he described as the “three major imbalances” fueling inflation so high that it overheated the economy. The first was a significant spike in consumer demand for certain categories, particularly durable goods and housing, which created a seller’s market with higher than normal prices created when demand exceeded supply.

The second major imbalance concerns the labor market, where demand has also exceeded supply.

“The ratio of vacancies to unemployed is nearing its all-time high, workers are quitting their jobs at a record rate and employers are raising wages,” he said. “This hot labor market is also linked to the imbalance between demand and supply for goods and housing, as companies seek to hire more workers to meet the high demand. And labor shortages and rising labor costs are contributing to price pressures on a wide range of goods and services.

The third imbalance identified by Williams was the global ramifications of the imbalanced supply-demand seesaw that contributed to supply chain issues. Crises abroad, including Russia’s war in Ukraine and Covid lockdowns in China, have limited the global supply of commodities.

“With clear signs of demand outstripping supply and an overly hot economy, the main objective of monetary policy is to reduce the heat and restore price stability,” Williams said. “Although we are facing very unusual and difficult circumstances, I am convinced that we have the right tools to achieve our objectives.

“In fact”, he added, “we have an advantage over previous inflationary episodes: our monetary policy tools are particularly powerful in the very sectors where we see the greatest imbalances and signs of overheating – such as goods durable goods and housing. Higher interest rates will bring demand in these rate-sensitive sectors back to levels that are more in line with supply. It will also reduce the heat in the labor market, reducing the imbalance between job offers. employment and available labor supply.

William insisted that the Fed’s strategy of raising the target range for the federal funds rate is key to solving the problem. The funds rate has already been raised by 75 basis points this year and Williams predicted that “continued increases in the target range will be appropriate.”

He also noted that from June 1, the central bank will begin to reduce the size of its holdings of US Treasury securities, agency debt and agency mortgage-backed securities. Williams said “the reduction in the balance sheet will happen over the next few years.”

“Our monetary policy actions will cool the demand side of the equation,” he said. “I also expect that over time the factors contributing to supply shortages will be resolved, so some of the rebalancing will be through increased supply, both in the United States and in the world.”

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