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Q&A Transcript

Michael McKee: Numbers just came out pretty amazing. Are you continually surprised by the American consumer?

John Williams: Well, first of all, welcome to the New York Fed. We're celebrating the 100th anniversary of this building here on Liberty Street. So consumer spending has been strong. I think it is driven by strong fundamentals.

Job growth has been solid. We've seen real wage gains. We have we're in a pretty strong economy with good growth. So, yes, it is part of that story. But, you know, I think what we're realizing is we're getting a nice tailwind from the supply side of the economy with good labor force growth, strong productivity, good real wage gains.

So with that, I think, you know, consumers are spending.

Michael McKee: What's the thinking in your office and among your colleagues about does this last or is this a surprise that you think could go away at any minute?

John Williams: Well, one thing that makes it really hard to forecast is we're still feeling the effects of the after effects of the pandemic and Russia's war in Ukraine and all the things that have happened in between.

So we're definitely still seeing an adjustment process by the consumer, by in the economy overall. But overall, I think that the economy will continue to grow at a solid rate this year, probably not as high as the 3.1% we saw last year, but something like 2% or around that. So I feel like we're still in a good place, probably not as rapid of growth as we saw last year.

Michael McKee: Speaking of international events, I have to ask you, the Middle East going on right now. How do you think about the economic and policy implications of these events?

John Williams: Right. So obviously, we're watching this very carefully. I think the primary way you see it to. How is, first of all, through commodity prices.

But second is what we think of as a flight to safety, where investors, when they see risks in the global economy, they tend to bring money to the US dollar and that tends to push yields down somewhat. Right now, I think, you know, markets are pretty, pretty stable. We're not seeing big movements in that way.

But generally that's the way I would... what I would expect to see when you see heightened geopolitical tensions.

Michael McKee: When you think about what the markets are reacting to and what could come out of this, is this more of an inflation worry or a growth concern?

John Williams: Well, I it's really hard to say. It really depends on how the situation evolves.

Right now, I don't think of this as maybe in the near term, it could be effects of financial conditions in commodity prices, as I mentioned. I don't see this as a major driver of the overall forecast or outlook for economic growth or for inflation.

Michael McKee: Speaking of inflation, CPI came in much hotter than expected and sort of freaked everybody out on Wall Street. And markets sort of took that as a turning point in Fed policy. Do you see it that way?

John Williams: I don't see it as a turning point. I think that, you know, we've we saw inflation come down maybe quicker than we expected last year. We definitely saw really a lower readings in inflation in the final six months that I never thought that that was going to stay that low. That was kind of unusually low.

We're now seeing some and a little bit unusually high readings. Overall, I think the picture is one that the economy is getting in better balance. We still have a strong labor market and we're seeing inflation gradually come down. Now, I do think that, you know, for me, what do I see in the data? Well, the economy and you pointed out the retail sales today, but more broadly, the economy continues to be strong.

Again. I think we're being helped by strong demand and supply. And those are helping, you know, growth. And we're seeing, you know, inflation come down a little bit slower than expected. And so, you know, I think markets are taking all of that information into account in how they how they expect policy to be.

For me, I'm, you know, data dependent, as always, really take the totality of the data and think about what it means for achieving our maximum employment and price stability goals. So I don't see this as a a game changer or anything. I do think it's important information that will clearly, you know, affect my thinking in my forecast.

Michael McKee: Even those who have thought about what PCE might be after the PPI and CPI, inflation isn't coming down rapidly any more. But you do have the strong growth. You have very low unemployment. Why cut rates if the economy is doing fine at this level?

John Williams: Well, first of all, I think monetary policy is working at the rates we have now. So I think I think monetary policy is in a good place over the past 12 to 18 months.

We've seen all pretty much all the measures of imbalances in the labor market enter our economy recede, many of them back to levels we saw in 2018 or 2019. So we're seeing that, you know, restoring balance in the economy. We are seeing a slow decline in inflation. So I do think monetary policy right now is in a in a good place. I'm not fixated on where do rates need to go over the next year.

What I'm focused on is how do we best achieve our maximum employment and price stability goals? The data we're seeing show the economy strong, and that's really good news and labor markets strong. At the same time, we are getting a better balance and we're seeing some declining overall inflation.

So for me, it's really about getting that right. And then whatever we need to do to adjust monetary policy, we can do to best continue the progress towards our goals. So that's how I'm thinking about it. And we just have to keep watching the data and make the decisions based on those goals.

Michael McKee: What is your base case that you will cut rates this year?

John Williams: My own view is I think that with inflation continuing to gradually come down and I would guess I would say gradually is the operative word here.

And with the economy remaining strong, I do think that given where the level of rates are, real interest rates now are considerably higher than they were before because inflation has come down quite a bit. So we will need to start a process at some point to bring interest rates back to more normal levels. And my own view is that we will you know, that process will likely start this year, but again, it will be driven, driven by the data and achieving our goals.

Michael McKee: So it's possible you don't do anything this year.

John Williams: Well, again, you're asking me to speculate on what will happen, of course. And, you know, right now I think monetary policy is in a good place where we're seeing the but we're seeing progress. It's a bumpy road on the inflation front. And we'll just have to figure out how to best adjust policy as needed to achieve our goals.

Michael McKee: You mentioned the real rate.Is policy tight now?

John Williams: I do think we have restrictive monetary policy. I do think policy is tight. So how do I what do I look for? Because the economy's growing. It grew over 3%. You know, we're adding about, what, 275,000 jobs over the first three months. So that seems like an economy that's really strong and not being held back by monetary policy.

But if you take a step back, all these measures of imbalances in the labor market, whether job openings or wage rates or quits rates or all the other indicators we look at, all of them are moving from being very tight to less tied, and most of them back to a more strong labor market or getting closer there. I mean, job openings are still high, wage growth is still a bit high, but these are all moving in the right direction.

So I think the stance on monetary policy is really been an important driver of restoring balance in the economy and helping bring inflation to 2% towards 2%.

Michael McKee: What's left with inflation? Is it something that you can affect or are these non interest rate responsive sectors?

John Williams: You know, monetary policy can affect inflation in the economy. It works through multiple channels.

So there are some sectors that maybe are not as interest sensitive, but the economy is interest rate sensitive. We've seen that over the past couple of years as we've moved from an accommodative policy to a restrictive policy. So monetary policy is working as expected, to continue to work to to bring inflation down.

You're going to see it, you know, show up in different parts of the inflation, you know, goods versus services and things. But over the past year, year and a half, we have seen a broad based decline in inflation in all of these categories. It's just that we haven't gotten all the way to 2%.

And we just need to keep policy in the right place to achieve that 2% goal.

Michael McKee: Question I always ask is what are CEOs companies telling you these days about their hiring plans, about what they're having to pay and about inflation, whether they're raising prices or having to pay higher prices?

John Williams: Well, clearly, if you asked me this question a year or two ago, that's all they would be talking about.

Price increases, compensation increases, the challenges of hiring employees today. I think those you know, those comments are still out there a little bit, but far less than before. We're hearing from our contacts, you know, that it's easier to fill positions than it used to be.

Wage compensation pressures are less and price pressures are are less. I think that's consistent with what we're seeing overall in the data.

Michael McKee: You're the potential growth guy. Has potential growth moved up?

John Williams: You know, I am getting more optimistic about potential growth in the economy, I think for a couple reasons. One is, you know, through the pandemic and everything that happened after that, I, like most people, had concerns that the supply side of the economy had had suffered, you know, damage the labor force and in terms of labor force participation.

And, you know, as we've watched the data over the past few years, we've seen an increase in labor force participation, increase in labor force growth, and we've seen a rebound in productivity. Now, I'm not saying that we're in some, you know, new high growth kind of world, but I do think a potential growth is probably closer to 2% or a little higher, which is well above a lot of estimates in the past few years.

And that's a very positive sign for us real incomes and for the economy and obviously for helping get inflation down.

Michael McKee: A question for all of our friends around us on trading desks. You had a briefing on QT at the last meeting from the Fed staff and members, according to the minutes, generally agreed that it should start soon.Does that mean may or does that mean June?

John Williams: Well, I think we said fairly soon. And the you know, I think that the reasoning for slowing the pace of reduction of our balance sheet makes a lot of sense. It's a prudent course of action. We are decreasing the balance sheet quite rapidly. And and by slowing that, we'll have more ability to monitor, assess and analyze as we get eventually to an ample reserves kind of world that we're aiming for.

Everything is going with the balance sheet. Everything is going exactly as planned and things are going well when we decide to slow the pace of the balance sheet. That's a decision for the committee. No decision was made at the last meeting, but obviously we'll get together relatively soon and discuss this further.

But to me, this is a sign of success of the plans we laid out almost two years ago to reduce the balance sheet. We've had very little disruption in markets. It's worked exactly as planned, and we're just executing on that plan and that's going very smoothly.

Michael McKee: So it could come before rate moves.

John Williams: You know, these are really separate issues. I mean, our numbers are shrinking the balance sheet. We're focused on getting to ample reserves on monetary policy. We're very focused on achieving our maximum employment and price stability goals. Those are different objectives. Those instruments can obviously move in different times in different ways.