John Williams, Speech: Shifting Gears, Rebalance and Realignment in the Economy

Inflation Expectations

“Inflation expectations represent another gear that is turning at an encouraging speed. Longer-run inflation expectations remain remarkably stable at levels consistent with 2 percent inflation.² After rising moderately last year, households’ three-year-ahead inflation expectations are now back to where they were in January 2021, and one-year-ahead inflation expectations have started to reverse the rise seen over the past year and a half.^”

Fed Funds

“At its meeting last month, the FOMC raised the target range for the federal funds rate to 4-1/4 to 4-1/2 percent, the seventh consecutive increase. The FOMC’s December 2022 Summary of Economic Projections showed that a large majority of participants saw the federal funds rate reaching a level between 5 and 5-1/2 percent by the end of this year.”

“The FOMC statement indicated that “the Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”⁴

Bringing inflation down is likely to require a period of below-trend growth and some softening of labor market conditions. But restoring price stability is essential to achieving maximum employment and stable prices over the longer term, and it is critical that we stay the course until the job is done.”

GDP

“We are seeing the shifting gears of tighter monetary policy having the desired effects. Broad indicators show that financial conditions have become significantly less supportive of spending. As a result, I expect real GDP growth to be modest this year at around 1 percent.”

Jobs

“Robust hiring, low unemployment, and strong nominal wage growth mean the labor market remains remarkably tight. But with growth slowing, I anticipate the unemployment rate to increase from its current level of 3-1/2 percent to around 4-1/2 percent over the next year.”

Inflation

“Turning to inflation, I expect cooling global demand and supply improvements to result in declining inflation for goods. These factors should contribute to inflation slowing further from its current rate to around 3 percent this year. While services inflation is still a sticking point, I expect overall inflation to come back down to 2 percent in the next few years as further tightening of monetary policy realigns the balance between demand and supply.”