Fed's Williams sees inflation falling to 2% despite recent 'bumps'

By Greg Robb

If economy performs as expected, rate cuts can start this year, New York Fed president says

The U.S. economy is in better balance, which will allow inflation to continue on a gradual path to the Fed's 2% annual-rate target, New York Fed President John Williams said Thursday.

"I expect inflation to continue its gradual return to 2%, although there will likely be bumps along the way, as we've seen in some recent inflation readings," Williams said in a speech to the Federal Home Loan Bank of New York.

At the same time, if the economy performs as expected, it will make sense for the Fed to start to "dial back policy restraint" by cutting its policy interest rate, Williams said.

While many economists were alarmed by the hotter-than-expected consumer-inflation report for March - the third straight month of above-expected readings - Williams emphasized the positive, noting how far inflation has fallen over the past year.

Read more: Rising consumer prices show inflation heading in the wrong direction. What next?

"The 12-month percent change in the personal consumption expenditures (PCE) price index has continued to decline, falling from its 40-year high of above 7% in mid-2022 to 2.5% in the latest reading," Williams said.

"I expect overall PCE inflation to be 2.25% to 2.5% this year, before moving closer to 2% next year," he added.

Williams said that the overall outlook for supply chain issues "is still broadly on a good path" despite the collapse of the bridge in Baltimore, which has temporarily blocked access to the city's port.

The New York Fed president noted that inflation expectations have fallen to levels seen before the COVID-19 pandemic.

Williams is a member of Federal Reserve Chair Jerome Powell's inner circle and always has a vote on interest-rate decisions.

In his prepared remarks, Williams said that the labor market has also returned to something closer to normal. He said he expects the unemployment rate to peak at 4% this year and then gradually move lower.

He expects the economy to grow 2% this year, down only slightly from 2.5% growth rate in 2023.

Stocks SPX DJIA were set to open lower on Thursday while the 10-year Treasury note yield BX:TMUBMUSD10Y rose to 4.583%

-Greg Robb

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04-11-24 0849ET

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