John C. Williams, the president of the Federal Reserve Bank of New York, said Thursday that the central bank has more to do in its push to slow the economy and bring inflation back under control.
While Mr. Williams greeted a recent slowdown in inflation as welcome — and said nothing to crush expectations in financial markets that the Fed might slow the pace of rate increases at its next meeting — he also emphasized that rates would rise more before the central bank can feel sure inflation was slowing sufficiently.
“It will take time for supply and demand to come back into proper alignment and balance, so we must keep moving,” Mr. Williams said at an event in New York on Thursday evening, adding later that there is “a ways to go” before rates will be high enough.
Mr. Williams said he has not yet decided how big of a rate move would be appropriate at the Fed’s next meeting. The central bank raised rates rapidly in 2022, pushing them from near zero to above 4.25 percent. But Fed officials began to slow their moves in December — moving from three-quarter point moves to a half-point increase — and investors now widely expect them to slow to a quarter-point increase for their Feb. 1 decision.
Those expectations have been reaffirmed by Fed officials’ statements and by recent data reports, which have suggested that inflation is consistently slowing after peaking last summer.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
But Mr. Williams noted that while slowing inflation is good news, there is also evidence that the economy remains fairly strong.
“Clearly some of the readings on inflation have been encouraging,” Mr. Williams said, but he noted that the labor market remains solid. “If anything, I’ve been raising somewhat my forecast for growth.”
That would influence how high interest rates need to rise to be restrictive enough to bring inflation back down to the Fed’s goal, Mr. Williams said.
“It seems to me that demand is still very strong relative to available supply,” Mr. Williams said, and the “concern” is that this would continue to put pressure on inflation.
Other top economists and global central bankers have been voicing similar concerns about inflation’s potential staying power, including during panels at the World Economic Forum in Davos, Switzerland this week. Thomas J. Jordan, the head of Switzerland’s central bank, warned on Friday that it might be a challenge to get inflation all the way back to normal.
“It will be much more difficult to bring inflation from 4 percent to 2 percent,” Mr. Jordan said. Many central banks, including the Fed, target 2 percent annual inflation.
And Lawrence H. Summers, the Harvard economist and former Treasury secretary, said on the same panel in Davos that markets are being surprisingly single-minded in the way they are thinking about the way interest rates will shape up. Many investors expect the Fed to lift rates two more times before cutting them by the end of the year, and they anticipate that rates will remain low over the longer term.
“I can see many many more scenarios in which rates end up higher than what’s currently priced, than I can see scenarios where rates end up lower than what’s currently priced,” he said. “Therefore, I’m a bit surprised by the market’s forecast of what’s going to happen.”
Mr. Williams from the Fed said that even if inflation is still too high and the economy is stronger than expected, the Fed is past the phase where it mostly focused on the speed of rate increases, with the focus now on how high borrowing costs would eventually rise.
“At this point the speed is not the important thing — it’s really what level do we get to,” Mr. Williams said. “And then really importantly, moving to the next stage, how long do we need to hold.”
He acknowledged that it is a challenge to try to understand what is happening in the economy, and with price increases in particular.
“I don’t think any traditional rules of thumb based on historical experiences” apply, Mr. Williams said, explaining that the recent inflation has been “so extraordinary.”