Economy to Grow Slower, Inflation ‘Far Too High’: Fed’s Williams

John Williams, president of the Federal Reserve Bank of New York, speaks at an event in New York, on Nov. 6, 2019. Carlo Allegri/Reuters

John Williams, president of the Federal Reserve Bank of New York, is expecting America’s economic growth to slow down and inflation to cool in the coming years.

Due to the Fed’s tightening monetary policy, broad measures of financial conditions, including borrowing, equity prices, and mortgage rates, have become “significantly less supportive of spending.” Williams said during a speech at the Economic Club of New York on Nov. 28. “This has led to a decline in activity in the housing market and signs of general slowing in consumer expenditures and business investment spending. As this continues, I expect real GDP to increase only modestly this year and in 2023,” he stated.

Williams called inflation as being “far too high” and dubbed it the “No. 1 economic concern” across the globe. Persistent high inflation undermines the ability of the American economy to perform at its “full potential,” he added.

The Fed’s policy-making arm, the Federal Open Market Committee (FOMC), raised the federal funds rate to a range of 3.75–4.0 percent earlier this month, for the sixth consecutive increase.

However, inflation continues to remain well above the Fed’s target of 2 percent. In October, the annual inflation rate came in at 7.7 percent. Inflation has remained at or above 7.5 percent for every single month this year.

Williams expects inflation to decrease to 5.0–5.5 percent by the end of this year and then to 3.0–3.5 percent in 2023. He expects “further tightening of monetary policy” to help bring down inflation to 2 percent over the next few years.

Recession, Policy Tightening

In its November meeting minutes, FOMC members observed that inflationary risks were “skewed to the upside” and that elevated inflation might require a “greater than. assumed amount of tightening in financial conditions.” The Fed also raised the possibility of the U.S. economy slipping into a recession next year.

During a recent interview with CNN, Bank of America CEO Brian Moynihan said that due to too much COVID-19 stimulus, the American economy is now forced to “adjust to that decision,” with the Fed tightening rates quickly.

He predicted a “mild” recession in 2023, and expects the housing market adjustment to take “almost” two years.

At an event on Nov. 17, James Bullard, president of the Federal Reserve Bank of St. Louis, explained his opinion on what a sufficiently restrictive policy rate would be after accounting for the current macroeconomic environment.

“My approach to this question is based on ‘generous’ assumptions—assumptions that tend to favor a more dovish policy over a more hawkish one,” he said.

“Even under these generous assumptions, the policy rate is not yet in a zone that may be considered sufficiently restrictive.”