Inflation in the US has fallen from pandemic-era highs, but more needs to be done to push consumer prices durably down to the official target, John Williams, president and CEO of the Federal Reserve Bank of New York, said amid global market speculation of when interest rates may be cut in the world’s largest economy. “(US) Inflation is now around 2-1/2 percent, so we have seen significant progress in bringing it down. But we still have a way to go to reach our 2 percent target on a sustained basis. We are committed to getting the job done,” Williams said while delivering the fourth Suresh Tendulkar Memorial Lecture at the Reserve Bank of India on Friday.
Latest US data showed that the personal consumption expenditures price index – the Fed’s preferred price gauge – climbed 2.6% on a year-on-year basis in May. Williams, a voting member of the Federal Open Market Committee – the US rate-setting panel – said that his views were personal. The central banker emphasized that uncertainty in monetary policy would continue for some time, given the volatile global environment.
“I’ll look at the path of the New York Fed’s Global Supply Chain Pressure Index, which gauges global supply-chain disruptions. By late 2021, it rose to more than four standard deviations above the historical average. It finally returned to normal levels last year,” he said. “To put the rarity of such events in perspective, a single four-standard-deviation event would occur about once every 2,500 years based on a standard normal distribution.”
Speaking about the much-debated neutral rate of interest, or “R-star,” Williams said that the factors that had contributed to a higher neutral rate of interest a year ago were now changing course. The neutral rate of interest represents the level at which monetary policy is neither tight nor loose. Theories about the level at which the Fed may consider the neutral rate of interest as appropriate have abounded over the past year, as has accompanying speculation as to whether rates would remain higher for longer or come down in the foreseeable future.
“But in the US, what we see now is – we’re seeing growth slow, we’re seeing inflation come down quite a bit, interest rates haven’t come down, so, the constellation of factors that made the R-star look higher now are in the process of reversing,” he said. A higher neutral rate has often been thought to imply stronger economic growth and therefore a cause for policy rates to be elevated.
In response to a question about potential political pressures on the Fed’s policy making ahead of the US elections in November, Williams said that the central bank would always focus on the best decisions for the US and global economy and had the independence to make tough decisions “that may not be popular in the short-run.”
Federal Reserve Chair Jerome Powell has suggested that “more good data” may pave the way for rate cuts, a statement that has garnered significant attention. Powell’s comments come at a time when the US economy is showing signs of cooling inflation and slowing growth, which could potentially lead to a shift in the Fed’s monetary policy stance.
Powell’s remarks indicate that the Fed is closely monitoring economic indicators and is open to adjusting its policy if the data supports such a move. This approach underscores the Fed’s commitment to data-driven decision-making and its willingness to adapt to changing economic conditions.
The possibility of rate cuts has been a topic of much debate among economists and market participants. Some argue that lower rates could provide a boost to the economy by making borrowing cheaper and encouraging investment. Others caution that premature rate cuts could risk reigniting inflationary pressures.
Powell’s comments suggest that the Fed is taking a cautious approach, waiting for clear evidence of sustained improvement in economic conditions before making any changes to its policy. This stance is likely to reassure markets that the Fed is not rushing into any decisions and is carefully weighing the potential risks and benefits of rate cuts.
The Fed’s focus on data-driven decision-making is particularly important in the current economic environment, where uncertainty remains high. Global supply chain disruptions, geopolitical tensions, and other factors continue to pose challenges to the economic outlook. By relying on data, the Fed can make more informed decisions that are better aligned with the evolving economic landscape.
Powell’s remarks also highlight the importance of communication in monetary policy. By signaling that the Fed is open to rate cuts if the data supports it, Powell is providing markets with valuable information about the Fed’s thinking and its potential future actions. This transparency can help to reduce uncertainty and provide a clearer framework for market participants to base their expectations on.
In conclusion, Powell’s suggestion that “more good data” may pave the way for rate cuts reflects the Fed’s commitment to data-driven decision-making and its cautious approach to adjusting its policy. This stance is likely to reassure markets and provide a clearer framework for understanding the Fed’s potential future actions. As the economic landscape continues to evolve, the Fed’s focus on data and communication will be crucial in navigating the challenges ahead.
Source: Various sources
