John Williams, Interview: CNBC

“Well, first of all, the recession is not my base case right now. I think the economy is strong. Clearly financial conditions have tightened and I’m expecting growth to slow this year, quite a bit relative to what we had last year. And actually slow to probably one to 1.5% GDP growth for the year, but that’s not a recession. It’s a slow down that we need to see in the economy to really reduce the inflationary pressures that we have and bring inflation down.”

“The unemployment rates actually going to be moving up over the next few years. So that’s not a recession, but I think that’s my base case is the economy slows enough to see the unemployment rate get up to about a little over 4% over the next couple years.”

Regarding the Neutral Rate: “Well, there’s lots of ideas about the neutral rate and how to think about it. I tend to focus on the longer run neutral rate, which is really determined by things like demographics and productivity growth and things like that. I don’t think that longer run notion of a neutral rate has changed in the last couple years. I still think it’s quite low. But to getting to your point, the neutral rate is really about a real interest rate. It’s about the nominal interest rate, less inflation. So to your question, given that inflation and inflation expectations are higher than they were, of course the nominal neutral rate or the interest rate that we need to have to bring equilibrium to the economy is higher while inflation is higher. And that’s an important ingredient in why we need to raise interest rates quite a bit this year and into next. Because we need to get not only nominal interest rates higher, but we need to make sure that the real interest rate, the interest rate is adjusted for inflation, are above zero and really achieving our goals.”