Fed’s Williams flags relative stability of longer run inflation expectations

By Michael S. Derby

(Reuters) – Federal Reserve Bank of New York President John Williams cited the relative stability of longer-run inflation expectations as good news on Wednesday as the U.S. central bank continues to work to get price pressures back to the desired level.

“The importance of maintaining well-anchored inflation expectations is a bedrock principle of modern central banking, but its precise meaning and validation has been open to interpretation,” Williams said in the text of a speech to be delivered to an audience in Zurich. “The news is mostly good—longer-run inflation expectations in the United States have remained remarkably stable at levels broadly consistent with the [Federal Open Market Committee’s] longer-run goal.”

Williams did not comment on monetary policy or the economic outlook in his prepared remarks; he was scheduled to take audience questions as part of his appearance.

Williams, who is also vice chairman of the rate-setting FOMC, weighed in as the Fed has been pressing forward aggressively with interest rate hikes aimed at lowering the highest levels of inflation seen in four decades.

So far, hikes in the Fed’s target rate range, now standing at between 3.75% and 4%, have not lowered price pressures much back to the 2% official target. Over recent days, Fed officials have followed last week’s FOMC meeting with comments that have opened the door to slower rate rises over coming meetings, while also signaling the final stopping point for the tightening campaign could be higher than the 4.6% policy makers penciled in at their September meeting.

Fed officials say they believe that public expectations of price pressures in the future exert a strong influence on where inflation is today. Officials have repeatedly pointed to the relative stability of longer-term inflation expectations, which can be measured in multiple ways, as a vote of confidence by the public that the Fed will get inflation back to target at some point.

Williams’ speech hashed through the multiple ways inflation projections are measured, be it from market pricing levels to surveys of economists and the broader public. He noted that short-term inflation expectations, which have risen, have been the most reactive to incoming inflation data.

Williams also noted that uncertainty over the inflation outlook has risen and there have been some curious developments as well. “The one surprising wrinkle worth further study is the increasing divergence in views about future inflation, including the high share of those expecting deflation, and what this portends for the future,” he said.

Deflation is an outright decline in price pressures, and it’s somewhat surprising that some would worry about such an outlook at a time of high inflation and few clear signs of imminent relief.

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