John C. Williams, president and CEO, defended the Federal Reserve”™s response to the historically high inflation rates burdening the country, stating that the central bank is properly using monetary policy to bring the difficult economy back under control.
Speaking on May 10 at the NABE/Bundesbank International Economic Symposium in Germany, Williams identified the Federal Reserve”™s “dual mandate of price stability and maximum employment. Although the task is difficult, it is not insurmountable. We have the tools to return balance to the economy and restore price stability, and we are committed to using them.”
Williams noted that inflation “has increased rapidly and dramatically to levels last seen in the early 1980s ”” a year ago, overall inflation, as measured by the percent change in the personal consumption expenditures price index, was 2.5%. In March, it was 6.6%.”
Williams identified what he described as the “three major imbalances” fueling high inflation to the point that it has overheated the economy. The first was a significant spike in consumer demand for certain categories, particularly durable goods and housing, which has created a seller”™s market with higher-than-normal prices created when demand outstripped supply.
The second major imbalance is in the labor market, where demand also outpaced supply.
“The ratio of job vacancies to the unemployed is near its all-time high, workers are quitting jobs at a record rate, and employers are bidding up wages,” he stated. “This sizzling hot labor market is also related to the imbalance between demand and supply for goods and housing, as businesses seek to hire more workers to help meet the high demand. And labor supply shortages and rising labor costs are contributing to price pressures across a wide range of goods and services.”
The third imbalance Williams identified was the global ramifications of the lopsided supply-demand seesaw that contributed to supply chain problems. Overseas crises, including Russia”™s war in Ukraine and China”™s Covid lockdowns constrained the global supply of commodities.
“With clear signs of demand exceeding supply and an economy running too hot, the primary focus of monetary policy is to turn down the heat and restore price stability,” Williams said. “Although we are facing highly unusual and challenging circumstances, I am confident we have the right tools to achieve our goals.
“In fact,” he added, “we have an advantage over previous inflationary episodes: Our monetary policy tools are especially powerful in the very sectors where we see the greatest imbalances and signs of overheating ”” such as durable goods and housing. Higher interest rates will cool demand in these rate-sensitive sectors to levels better aligned with supply. This will also turn down the heat in the labor market, reducing the imbalance between job openings and available labor supply.”
William insisted the Fed”™s strategy of raising the target range for the federal funds rate is key to solving the problem. The funds rate has already been hiked by 75 basis points this year and Williams anticipated “ongoing increases in the target range will be appropriate.”
He also noted that beginning on June 1, the central bank will start reducing the size of its holdings of U.S. Treasury securities and agency debt and agency mortgage-backed securities. Williams stated the “reduction of the balance sheet will play out over the next few years.”
“Our monetary policy actions will cool the demand side of the equation,” he said. “I also expect that over time, the factors contributing to supply shortages will be resolved, so that some of the rebalancing will be accomplished through increases in supply, both in the United States and around the world.”
