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Transcript: WSJ Interview With New York Fed -2-

I will emphasize that the service sector still has -- you know, inflation has been very low in much of -- much of the economy. So a lot of these examples that we have are really in specific categories of goods. And we're looking at, of course, the broad -- the broad measure of consumer prices, not just, you know specific -- (inaudible).

MR. DERBY: You mentioned in the speech yesterday that you expect inflation to run somewhat above 2% this year as this reopening process plays out and then ease back next year. I see time and time again from people that watch the Fed, they want to know where your red line for inflation is. People want to know how much inflation the Fed will tolerate before it decides something needs to shift on monetary policy. And you I'll note some of your colleagues have thrown out numbers like 2 1/2 as, you know, a number that they would be OK to live with. How much of an overshoot of the target are you willing to tolerate?

MR. WILLIAMS: Well, context really matters here. And I think that if you had asked me this question several months ago when the recovery was clearly not moving as quickly as we're seeing now, you know, the -- I think a lot of people were thinking about inflation which had been running well below 2% moving up to 2%. And then the question was, how far above 2% are you comfortable with? So that's the context it had been, and that's a reasonable question to be thinking about.

But today I think we're slightly in a different dynamic. Right now, with the base effects -- I talked about yesterday the fact that some of the big declines that happened in March and April last year will be falling out of, you know, typical 12-month change statistics, 12-month percent change statistics or -- (inaudible) -- change statistics, that we're going to see a rise in measured inflation rates coming in the next few months. And so I think that context is one of just making sure we understand to what extent this is just a reversal of some price declines that happened a year ago, and doesn't really indicate anything about underlying inflation. It just kind of depends on how you take these averages. And to what extent do these represent what looks like bottlenecks or maybe temporary shortages of some goods in the economy, and to understand that.

And then, looking past that, past what's happening over the next several months, is really just making -- from my perspective is looking and making sure we understand what the underlying inflationary trends are and making sure that we're in a situation where inflation is going to meet this goal of averaging 2%t, and that we're, you know, we have inflation expectations well-anchored to 2%. So I think for my money, once we get through this kind of period of some volatility in inflation measures because of some of the special factors from Covid, it's just really getting back to, I think, where we started with, is we really want inflation to be anchored at 2%. We want to have inflation averaging 2% and inflation expectations measures, as best we can, you know, gauge them, being there.

So that's how I view that. It's not like you said, I'm not going to describe some red line or any other line -- (laughs) -- about that. It's really about a judgment based on all the information we have, and that's where we end up.

The only thing that's a little -- more, you know, complicated about this is we're actually seeing this temporarily high inflation now and then we're going to be moving down. And then it's going to be, you know, just making sure that we're achieving our goals.

I will give you a historical example of this that I was looking back on and trying to think -- you know, I feel like I've read this book before. (Laughs.) You know how you have that in life when you're reading a book and you say, 'Wow, this is a great book' but I feel like I've read it before? Well, if you look at 2011 -- and I don't have the data on my screen right now so, you know, look that up -- but we saw in 2011, really early in the last recovery, a pickup in overall inflation which obviously was driven in part by energy prices, but even core inflation moved up back then. And there was a lot of debate at the time about, 'Oh, this is a sign that inflation has, you know, turned the corner and the economy's really, you know, hot, and you know, you got to worry about inflation.' And really, it was even back then, which I guess is about around 10 years ago, it was a similar kind of dynamic coming out of the depths of the Great Recession. And of course, in 2011, as you well remember, the economy was nowhere near full employment or maximum employment, and it really wasn't a sign of the economy overheating but more of a sign of some specific factor of the rebound in commodity prices and some other prices.

So, again, have to be very, you know, careful in analyzing the data, and focus on making sure we achieve this goal of inflation averaging 2% and anchored at 2%.

MR. DERBY: How do you keep these sort of numbers from causing a deterioration in inflation expectations among the public? Among financial market participants, there's a constant din of concern about inflation worry. You've talked about the inflation expectation. Yesterday, you talked about the inflation expectations numbers as having mostly returned to where they were pre-pandemic. Chair Powell has said the same thing. But as this process plays out, how do you really manage this process so that there isn't sort of a psychological shift in the public and the inflation environment starts to unravel on you?

MR. WILLIAMS: Well, I think it starts from our focus on really keeping 2% inflation and having inflation expectations anchored at 2%. Back in 2012, when we first put out our long-run goals and monetary policy strategy document, it emphasized the 2% inflation. I mean, it put out there this explicit 2% longer-run goal and the importance of inflation expectations. And in the new statement that we put out last year and updated in January, or put out again in January, it really emphasized the importance of that even more, at least in my view. I mean, there were a number of changes that were made, but the role of making sure that inflation really is at 2%, and that we achieve that and sustain that, and that we have inflation expectations anchored at 2%.

So I think our framework is an evolution from the previous description of our monetary policy strategy. But if anything, I think, appropriately, it just emphasized that we don't want inflation too low -- that's the problem with the last decade -- but we don't want inflation too high, either.

I think the second thing is we have this outcome-based guidance in our monetary policy statements and completely aligned with our framework. And that really focuses not on some kind of timeline or kind of calendar or something like that in being -- sitting there thinking, well, this is how we're going to do things over the next period of time, but really focused on what actually is happening. What's happening with the data in terms of employment, in terms of inflation, and how has the outlook and the risks to the outlook evolved? And that's what we've been focusing on.

I think that will continue to serve us well because this has been a period where the economic outlook and data have been shifting pretty dramatically and in ways that were hard to predict. And so we just got to stay focused on maintaining our maximum employment and price stability focus, and being able to evolve and adapt to any changing circumstances.

I think that the issue of a demand-driven -- which I think is what we're talking about here -- demand-driven rise in inflation, I mean, I think there would be, you know, we have a lot of indicators, both wages, intermediate input prices, a lot of other measures that we study very carefully. So we have the analytical kind of ability to watch inflation and inflation expectations carefully. And, yes, I'm going to say it, that we also have the ability and the tools to respond and make sure that inflation doesn't get sustained, you know, at too high a level, sustained at too high a level.

MR. DERBY: Would you be able to tell me what dot you submitted at the March FOMC? And if you had been able to do that process at the April meeting, would that dot have changed?

MR. WILLIAMS: Well, we're not allowed to talk about our specific submissions to the SEP.

But you know, my view of the overall outlook in March -- and I'll give my view of the outlook -- I mean, is not probably that different than the median. I'm talking about the economic outlook. Like I said, I'm expecting 7% -- roughly 7%--growth this year. I think back in March the median was about 6.5%. We've got some good data since the March meeting I think that suggests maybe even a little stronger growth this year. I mean, just looking at the first quarter, growth for that was pretty impressive. And GDP and employment gains in March were very strong.

So my view of the economy and inflation is pretty consistent, I think, with very strong growth this year, continuing good growth. Nothing like 2021 next year, but continued above-trend growth and unemployment continuing to move down. I do think we'll see unemployment rates eventually similar to what we had before the pandemic in my baseline outlook over the next few years. And I do see inflation coming back down next year, as I said.

In terms of monetary policy -- now I'm getting to your question about dots, really -- I think, again, it's an outcome-based guidance we've given. It's outcome-based decision making. It really is. It depends what's happening in the labor market, what's happening in the economy, what's happening in terms of inflation, inflation expectations. So I personally think that that's the right way to think about it. And I think it's a -- especially now, where there's still quite a bit of uncertainty out there, we just need to be, you know, focused on our goals and taking the policy actions that will best achieve those goals.

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May 05, 2021 05:44 ET (09:44 GMT)

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