The U.S. central bank’s interest-rate increases may lead to somewhat higher unemployment as it attempts to bring about a “soft landing” while tackling high inflation, New York Federal Reserve Bank President John Williams said.
“When I think of a ‘soft landing,’ it’s really a matter of ‘Yes, we could see growth below trend for a while, and we definitely could see unemployment moving up somewhat, but not in a huge way’,” Williams said Tuesday while answering questions after a speech at a symposium in Eltville, Germany.
“I would not define a soft landing as unemployment staying at 3.6%,” he said. “I would define it as really maintaining a healthy, strong labor market while inflation is coming down.”
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In his prepared remarks, the New York Fed chief outlined a scenario in which higher interest rates would help bring the inflation rate down to “nearly 4%” before declining to “about 2.5%” in 2023 and returning close to the Fed’s 2% target in 2024. Meanwhile, the U.S. job market and economy should “continue to show strength and resilience,” with growth of “around 2%” this year and “the unemployment rate to remain around its current low level,” he said.
Last week, the Fed authorized a half-percentage-point increase in its benchmark federal funds rate, marking the largest single hike since 2000. Chair Jerome Powell told reporters afterward it was on track to follow up the move with additional half-point increases at each of its next two policy meetings in June and July, adding that there was a “good chance” that the Fed could achieve “a soft, or soft-ish, landing” for the economy.
Williams said he expects the central bank “will move expeditiously in bringing the federal funds rate back to more normal levels this year.”
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Speaking to reporters after the event, he said that 50 basis-point increases, coupled with the Fed’s plan to reduce the size of its balance sheet work as “a pretty important and significant removal of monetary policy support for the economy.” Doing these simultaneously “gives us a little space to move in something like a 50 basis-point increment at the next couple of meetings.”
Inflation in the 12 months through March was 6.6%, according to the Fed’s preferred gauge, marking the highest reading in 40 years. Williams pointed to a variety of factors — including increased demand for goods and housing due to the pandemic, a hot labor market and global supply-chain problems aggravated in part by the Russian invasion of Ukraine — contributing to inflationary pressures.
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The U.S. unemployment rate stood at 3.6% in April, just above the pre-pandemic low of 3.5%. Buy total employment was more than one million jobs below Feb. 2020 levels.
“Our monetary policy actions will cool the demand side of the equation,” Williams 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.”
