The Fed: Fed’s Williams predicts the high rate of inflation this year will cool to 2% in 2022


The president of the New York Federal Reserve on Monday predicted a bout of high U.S. inflation will mostly fade away by next year and indicated he’s in no rush to raise interest rates.

In a virtual speech, John Williams said the economy “shows solid momentum” and that a reduction in the Fed’s bond-buying program “may soon be warranted.”

The central bank has been buying $120 billion a month in bonds as part of a strategy to keep interest rates low. Last week the Fed signaled it will announce plans in November to scale back purchases.

Yet Williams also cautioned the disruptions caused by the coronavirus pandemic are still affecting the U.S. economy and that these issues won’t clear up soon.

Williams pointed to ongoing shortages in labor and business supplies as a big contributor in the sharp increase in inflation this year as companies have had to pay more for wages and materials, leading to higher prices for a variety of products.

Inflation, measured by the Fed’s preferred PCE price barometer, was running at a 4.2% yearly rate as of July. That’s more than double the Fed’s 1.8% forecast at the start of the year.

Although inflation is now well above the Fed’s 2% target, Williams said he expects price pressures to ease as the pandemic fades and business returns close to normal. Yet he admitted the outlook is uncertain and he didn’t put a precise timetable on when inflation would return to the 2% range.

“This process of adjustment may take another year or so to complete as the pandemic-related swings in supply and demand gradually recede,” he said in a speech to the Economic Club of New York City.

Read: The Fed has bet on a future of low inflation. Here’s what could go wrong

Williams was one of three senior Fed officials, all seen as allies of Chairman Jerome Powell, who spoke on Monday to downplay the increase in inflation this year. Their bigger worry is the health of the U.S. labor market.

Read: Fed’s Brainard says spike in inflation this year is ‘transitory’

Also: Chicago Fed’s Evans says he’s worried about low inflation

While the Fed has “substantially” met its goal of raising inflation, Williams said, the central bank “has a long way to go” to achieve its target of reducing unemployment. Millions of people who had jobs before the pandemic still haven’t gone back to work, he noted.

“There are over five million fewer jobs today than before the pandemic, and the unemployment rate is still far above levels reached early last year,” he said.

The official jobless rate stood at 5.2% in August, well above the precrisis low of 3.5%. And Fed officials estimate the true rate of unemployment is several points higher.

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