By Michael S. Derby
NEW YORK (Reuters) - Federal Reserve Bank of New York President John Williams said Wednesday that inflation is still at problematic levels and the U.S. central bank will act to lower it, in comments that noted recent stress in the banking sector will likely weigh on economic activity.
“Inflation is still too high, and we will use our monetary policy tools to restore price stability,” Williams said in a speech given before a gathering held by the Money Marketeers of New York University.
Williams, who also serves as vice-chairman of the rate setting Federal Open Market Committee, did not comment on his personal view of what’s next for monetary policy, but he did note that central bank forecasts released recently flagged the prospect of more monetary policy tightening to help lower inflation, and he did not counter the view of what markets expect the Fed to do with rates.
The Fed has raised its short-term rate target very aggressively over the last year and at its late March meeting, it increased its rate target by 25 basis points to between 4.75% and 5%. It is widely expected to increase that rate by another quarter percentage point at its early May meeting and hold rates there for the remainder of the year.
In his remarks, Williams said that the banking sector stress that started last month and has resulted in extensive Fed emergency lending to banks seems to be cooling off.
“Conditions in the banking sector have stabilized, and the banking system is sound and resilient,” Williams said. But he added the troubles will likely make credit more expensive and harder to get, which will in turn will depress growth.
“It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy,” Williams said.
Williams noted in his appearance that the large levels of emergency bank borrowing from the Fed, which stood at $323 billion via three programs as of a week ago, are not an issue and the Fed is happy banks are seeking liquidity if they need it.
Williams then told reporters the strong levels of borrowing show that the stigma that had long caused banks to stay away from borrowing via the Fed's discount window is fading, and he added the Fed does not want to reintroduce it. He also said that it would be likely this borrowing declines as banking sector conditions further stabilize.
NO RECESSION EXPECTED
The central banker noted in his speech that while inflation is high it has been cooling. Against the current 5% increase, as measured by the February personal consumption expenditures index, he sees inflation easing to 3.25% this year and hitting the 2% target again within the next two years.
Williams also said a “very tight” labor market is also seeing some cooling. He said the unemployment rate, currently at a very low 3.5%, will likely rise to between 4% and 4.5% over the next year. Williams also sees growth moderating this year before rebounding next year.
Williams does not expect a recession in contrast to the staff view of the central bank, which was revealed in meeting minutes for the March FOMC meeting last week.