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New York Fed's John Williams Says Fed Far From Achieving Job, Inflation Goals — 3rd Update

By Michael S. Derby 

Federal Reserve Bank of New York President John Williams said Monday that while the U.S. economy is likely to have a very strong year ahead, there isn't yet an imminent need for the central bank to pull back on its aggressive levels of monetary policy support.

"The economy is now positioned to grow quickly" and "with accommodative financial conditions, strong fiscal support, and widespread vaccinations, I expect that the rate of economic growth this year will be the fastest that we've experienced since the early 1980s," Mr. Williams said in a virtual appearance where he also took questions from the audience and then reporters.

But that level of growth doesn't mean the Fed needs to shift gears. "We are still far from our goals of maximum employment and price stability," Mr. Williams said, adding "let me emphasize that the data and conditions we are seeing now are not nearly enough for the FOMC to shift its monetary policy stance."

Mr. Williams' comments were his first public remarks since last week's gathering of the rate-setting Federal Open Market Committee. Then, officials left in place the near zero interest rate stance they implemented just over a year ago and pressed forward with $120 billion a month in bond buying. In a statement announcing the status quo outcome, the Fed offered a view that showed increased confidence in the outlook that also flagged the likelihood of a temporary rise in inflation.

In March, Fed officials offered forecasts that penciled in no change in rates through at least 2023, and officials have given little guidance about the timing of when they will slow the pace of asset buying. At the press conference following last week's FOMC meeting, Fed Chairman Jerome Powell said "it's very likely, it seems to me, that for us to achieve the economic outcomes we would need to taper or to raise interest rates, we would also have to have made very substantial progress in getting the virus under control -- not necessarily fully under control," while adding "we don't have to get all the way to our [job and inflation] goals to taper asset purchases."

In his speech, Mr. Williams said Fed policy has been very helpful to the economy. "Our policy response, alongside vaccinations and fiscal support, has played an important role in putting the economy on a solid path forward."

Mr. Williams said he expects the U.S. economy to grow by 7% this year. On the inflation front, the bank president said inflation will rise "somewhat above" the Fed's 2% target this year from higher energy prices and comparisons to very weak data last year, but he doesn't expect enduring gains on that front.

"It's important not to overreact to this volatility in prices resulting from the unique circumstances of the pandemic and instead stay focused on the underlying trends in inflation," Mr. Williams said.

On the job front, Mr. Williams embraced recent data showing hiring coming back to life, while noting the economy remains about eight and half million positions short of where it was before the coronavirus pandemic struck the U.S. in March 2020.

"We will need big jobs numbers for some time to fully get the country back to work," Mr. Williams said, adding "I am hopeful that we will see very strong job gains over coming months as the economy continues to reopen."

Responding to reporters' questions after his speech, Mr. Williams said that knowing when the economy has reached maximum employment and runs the risk of creating too much inflationary pressures is difficult. However, he said the very low unemployment rate seen before the pandemic is helpful as a benchmark. The U.S. jobless rate hit 3.5% in the first two months of last year, amid inflationary pressures well below 2%. The current unemployment rate is 6% and is down from 14.8% in April 2020.

Mr. Williams told the audience that the Fed was keeping an eye on asset markets, where strong pricing levels across many different sectors have sparked concerns among some that very easy central bank monetary policy is creating asset bubbles.

"There's a spirit of optimism around the economy and we're seeing asset prices kind of reflect that," Mr. Williams said. He added the Fed isn't seeing a worrisome rise in borrowing levels or a general deterioration in credit standards. And more broadly, if problems were to arise in asset markets, Mr. Williams said Fed regulatory powers are better suited to deal with that.

In an appearance on CNBC Monday, Federal Reserve Bank of Richmond President Thomas Barkin said one of his key metrics for knowing when to pare back bond buying is the employment to population ratio, as opposed the unemployment rate, which many, including some Fed officials, believe understates the true level of joblessness in the nation.

Mr. Barkin said the employment-to-population ratio has seen only "modest progress" on recovering what was lost over the pandemic, and further improvement on this front will help drive his decision on when it is time to pull back on bond buying.

Write to Michael S. Derby at michael.derby@wsj.com

 

(END) Dow Jones Newswires

May 03, 2021 17:30 ET (21:30 GMT)

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