Summary

• Fed plans to continue rate hikes as inflation cools
• Price stability is key for long-term employment and stability
• Expects growth to moderate and unemployment to rise slightly.

The President of the Federal Reserve Bank of New York, John Williams, said in a speech on Thursday that the US central bank plans to continue with rate hikes and sees signs that inflationary pressures may be starting to cool off from high levels.

He stated that "with inflation still high and indications of continued supply-demand imbalances, it is clear that monetary policy still has more work to do to bring inflation down to our 2% goal on a sustained basis." Williams acknowledged that this process may require a period of below-trend growth and some softening of labor market conditions, but emphasized that restoring price stability is essential for achieving maximum employment and stable prices in the long term. He added that "it is critical that we stay the course until the job is done."

Williams, who also serves as Vice-Chairman of the Federal Open Market Committee (FOMC), did not specify in his prepared remarks what size rate increase he would like to see at the next FOMC meeting, scheduled for January 31-February 1. However, he did not push back on market expectations that the Fed will lift rates by a quarter percentage point at that meeting.

Last year, the Fed moved its short-term interest rate target higher at a historically aggressive pace in an effort to fight the highest inflation seen in decades. The rate increased from a near zero federal funds rate in March to between 4.25% and 4.5% by year's end. A number of those increases happened in super-sized 75 basis point increments.

At the December meeting, officials penciled in a 5.1% stopping point for rate hikes this year and increased their target rate by half a percentage point at that gathering. Now, with inflation pressures starting to wane and uncertainty surrounding how far the Fed will need to go, a number of policy makers have offered support in recent days for a 25-basis-point hike at the upcoming FOMC meeting.

In his speech, Williams said some economic trends are moving in the direction the Fed would like. He stated that inflation should cool to 3% this year and will return to the 2% target in the next few years. He also mentioned that high inflation is his main concern for 2023. Williams expects growth to moderate to 1% this year and said "robust hiring, low unemployment, and strong nominal wage growth mean the labor market remains remarkably tight." Despite the current 3.5% jobless rate, Williams sees unemployment ticking up to 4.5% over the course of the year, and described the current job market as "remarkably tight."