– Williams Says Inflation Expectations ‘Mostly Good’ But Cites Increased Uncertainty
– Barkin: More Tightening Likely Needed Even at Cost of ‘Downturn’
By Steven K. Beckner
(MaceNews) – Two Federal Reserve officials stressed the importance of keeping inflation expectations “anchored” Wednesday, but suggested that those expectations may be vulnerable to being underrmined in the current elevated inflation environment.
New York Federal Reserve Bank President John Williams seemed relatively comfortable with the state of inflation expectations, while Richmond Fed President Thomas Barkin suggested the Fed needs to be on guard against an increase and be ready to keep tightening monetary policy to ward that off.
Williams said “the news is mostly good” regarding inflation expectations.
“Longer-run inflation expectations in the United States have remained remarkably stable at levels broadly consistent with the FOMC’s longer-run goal. Inflation uncertainty has increased, but this does not appear to be due to unmoored longer-run expectations,” he said in Zurich at a SNB-FRB-BIS High-Level Conference on Global Risk, Uncertainty, and Volatility,
But he added, “the one surprising wrinkle worth further study is the increasing divergence in views about future inflation, including the high share of those expecting deflation, and what this portends for the future.”
Barkin sounded less cheerful in remarks to the Top of Virginia Chamber of Commerce.
“This slow return to normal levels of inflation could threaten the stability of inflation expectations,” he warned. “If there is one thing we learned in the ’70s, it is that the Fed can’t let inflation fester and expectations rise. If we back off for fear of a downturn, inflation comes back even stronger and requires even more restraint.”
“That’s why the Fed is not waiting around for things to settle on their own time ..,” he said, after saying the Fed will likely have to do keep raising short-term interest rates – even it means recession.
Williams’ and Barkin’s comments are among the first from Fed officials since its policymaking Federal Open Market Committee raised the federal funds rate by 75 basis points for the fourth straight meeting last Wednesday.
The FOMC served notice that further rate increases will be made “in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” And it said, “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.”
Chair Jerome Powell told reporters after the meeting that a slower pace of rate hikes come as soon as next month, but said “it is very premature to be thinking about pausing.” And he said rates will likely need to go higher than projected in September.
Williams, the FOMC vice chair, did not comment on the future funds rate path, but Barkin suggested he will support further rate hikes beyond the current target range of 3.75% to 4%, even if it leads the economy into recession.
“Getting to normal may lead to a downturn,” he said.
“The Fed is taking strong action to combat inflation,” Barkin noted. “We have increased the fed funds rate to just under 4%, started reducing our balance sheet and signaled that more rate increases are on the horizon.”
But Barkin, who will be voting on the FOMC again in 2024, cautioned that “our tools to quiet demand and return inflation to our 2% target operate with a lag and have been challenged by the artificial elements of today’s environment ….. As a result, bringing supply and demand back into alignment may require still more from us, creating risk to the broader economy …..”
“Getting to normal will help the Fed fight inflation,” he continued. “With demand, supply, commodity and wage pressure easing, the economy should get into better balance in the months to come.”
“But I expect that process to be a lengthy one, as these artificial pressures take time to settle and geopolitical risks continue, most recently with OPEC’s decision to cut oil production, he added.
Elaborating on inflation expectations, Williams said longer-run inflation expectations from the Survey of Professional Forecasters “have remained remarkably stable over the past year and a half, while the market-based measure and the Michigan survey rose modestly during 2021 before retracing some of those gains this year …. Market-based measures include a time-varying risk premium that may explain the modest movements in that measure.”
“In contrast to longer-run expectations, short-run and, to a lesser extent, medium-run inflation expectations responded to the sharp rise in inflation…,” Williams continued. “Consistent with past experience, one-year-ahead inflation expectations have been highly sensitive to incoming inflation during the recent period…..This suggests households view the run-up in inflation in 2021 as likely being less persistent than in prior episodes.”
Williams said, “the level of longer-run expectations in the SPF has consistently stayed very close to the FOMC’s 2% goal,” while “the other measures have generally stayed within pre-pandemic ranges, with most recent readings only slightly higher than corresponding average levels from 2014-2020.”
However, Williams expressed concern about “increased uncertainty” about the future course of inflation.
The other prominent official who has spoken since the FOMC meeting was voting member Boston Fed President Susan Collins. While supporting further rate hikes Friday, she maintained that monetary policy is already “restrictive” and said further rate hikes need to be more incremental.
As the FOMC continues to raise rates, she warned it increasingly will need to guard against “over-tightening,” Collins warned.