C. Peter McColough Series on International Economics With John C. Williams

John C. Williams of the Federal Reserve Bank of New York discusses monetary policy and the economic outlook for the year ahead.

The C. Peter McColough Series on International Economics brings the world’s foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by RealEcon: Reimagining American Economic Leadership, a CFR initiative of the Maurice R. Greenberg Center for Geoeconomic Studies.

STEIL: Good morning, ladies and gentlemen. For those of you I haven’t met before, my name is Benn Steil. I’m director of international economics here at the Council on Foreign Relations in New York. 

It’s my great pleasure and privilege to be introducing this morning’s speaker, John Williams. Dr. Williams is president and chief executive officer of the Federal Reserve Bank of New York. You can read the rest of his very impressive biography in your handouts. Today’s meeting is part of the Council’s C. Peter McColough Series in International Economics. Our participants here in the hall today, our council members in New York, are joined virtually by about 220 Council members who are participating virtually via Zoom. President Williams has a few opening remarks for us, after which we’ll have a brief conversation. And I promise to leave plenty of time for your questions. So, without further ado, President Williams, the podium is yours. 

WILLIAMS: Well, thank you. It’s great to be here. I always enjoy coming here to speak and, as you said, most importantly, have a good conversation with the group. Before I get started though, I’m going to give my standard—or our standard Fed disclaimer, that the views I express today are mine alone, and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. I think that’s a sentence that I have now spoken about a thousand times in my career, but it’s important to get that across.  

So, just as you expect, I’m going to be speaking about the E word, by which of course I’ll be referring to the economy. I’m going to talk about where the economy is headed, the process of getting supply and demand in better balance and bringing inflation back to the FOMC’s 2 percent longer run goal. I’ll also discuss the progress made toward the Federal Reserve’s dual mandate goals of maximum employment and price stability, as well as the path ahead for monetary policy. And I’ll start by discussing where the economy stands right now, broadly speaking. 

Now since it is back to school season, especially here in New York these last two days, I’ll throw out another E word. And this is a word that you may recall from your middle school vocabulary list. It’s not very commonly used, definitely not in my conversations. And that word is equipoise. The definition, according to Merriam Webster, is a state of equilibrium. So let me try out—try this word in a sentence, like in a spelling bee. Here we go. The significant progress we’ve seen toward our objectives of price stability and maximum employment means that the risks of the two sides of our dual mandate have moved into equipoise. Now, this is because supply and demand and imbalances have dissipated, labor market conditions have eased from being exceptionally tight, and inflation has come down significantly.  

Now, many factors have contributed to this favorable set of circumstances, and that would include the Federal Reserve’s strong actions to restore price stability. So let me delve deeper into the two sides of our dual mandate that have moved in equipoise, that’s inflation and the labor market. I’ll go in alphabetical order, so I’ll start with inflation. I’ve been using the analogy of peeling an onion’s layers to describe inflation, both how it rose and then how it’s since moderated. So in this inflation onion there are three layers. And each layer represents a major category of inflation—prices of globally traded commodities, prices of products or durable goods like appliances, furniture and cars, and then prices of core services.  

The sharp rise in inflation that we saw in 2021 and in 2022 was in large part due to the aftereffects of the pandemic, as well as Russia’s war in Ukraine and the consequent actions. Once those effects began to dissipate, the layers of the onion started to adjust in turn. Now, while each inflation layer normalized at a different speed, they all moved in the right direction. So this broad based downward movement has brought the overall inflation rate back down closer to our 2 percent longer-run goal. Now, this disinflation process is showing up clearly in the data.  

The twelve-month percent change in the personal consumption expenditures price index has declined from its forty-year high just above 7 percent in mid-2022 to 2 ½ percent in July. Measures of underlying inflation, like core PCE inflation and the New York Fed’s multivariate core trend inflation, similarly show a sizable decline over the past few years to around 2 ½ percent today. The decrease in inflation has benefited from a moderation in demand and improvements in supply that together have reduced the supply-demand imbalances, both here in the U.S. and internationally. Equally reassuringly, inflation expectations remain well anchored. New York Fed’s survey of consumer expectations shows inflation expectations have remained in their pre-COVID ranges at all horizons in recent months.  

Other measures of inflation expectations, both from surveys and from market-based measures, give a similar signal. And the Atlanta Fed has a measure of business inflation expectations which reflects the thinking of businesses in setting their prices. It, similarly, has returned to levels near its average in the 2012 to 2019 period. The disinflation phenomenon is not unique to the United States. You look at Canada, the United Kingdom, and most European economies, they’ve also experienced historically high inflation over the past few years and have similarly seen rapid declines. The global supply disruptions experienced following the pandemic and the war in Ukraine amplified the rise in inflation, and the restoration of supply and demand balance has accelerated its decline.  

Now, let me turn to the labor market. Now, even as the economy has grown at a solid pace, a wide range of indicators have pointed to a continued normalization in the labor market following the red-hot period in 2021 and 2022. Today most of these measures have moved from the tightest that they’ve been in over two decades to levels more consistent with the good labor market that existed in the period before the pandemic. The one measure that understandably gets a lot of attention is the unemployment rate, which has risen by nearly a percentage point from its very low reading back in early 2023. Still, it remains relatively low by historical standards and some of the increase that we’ve seen reflects a cooldown in the labor market from its overheated state. In addition, the increase in unemployment has occurred in the context of a strong increase in labor supply, rather than from elevated layoffs.  

So to get the full picture of the labor market and what it means for monetary policy, it’s important to monitor a wide range of data in addition to the unemployment rate. For example, I take the temperature of the labor market by looking at surveys of both businesses and households, the rates of quits, hiring, and job vacancies, and job-to-job transition rates and flows between unemployment and employment states. So when you look at all the data together, these indicate that the labor market is now roughly in balance, and therefore unlikely to be a source of inflationary pressures going forward.  

So what does that mean for monetary policy? So in our July statement, the FOMC said it judges that the risk to achieving its employment and inflation goals continue to move into better balance, and that it is attentive to the risk to both sides of the dual mandate. Regarding the path of policy going forward, the committee said there will be—it will carefully assess incoming data, the evolving outlook, and the balance of risks. And that does not expect it will be appropriate to reduce the target range to gain greater confidence that inflation is moving sustainably toward 2 percent. 

While the accumulated evidence has increased my confidence that inflation is moving sustainably toward 2 percent, the current restrictive stance of monetary policy has been effective in restoring balance to the economy and in bringing inflation down. With the economy now in equipoise and inflation on a path to 2 percent, it is now appropriate to dial down the degree of restrictedness in the stance of policy by reducing the target range for the federal funds rate. This is the natural next step in executing our strategy to achieve our dual mandate goals.  

And looking ahead, with inflation moving toward the target and the economy and balance, the stance of monetary policy can be moved to a more neutral setting over time—depending, again, on the evolution of the data, the outlook, and the risk to achieving our objectives. In terms of the Fed’s balance sheet, the committee began to slow the pace of decline in our security holdings back in June. This process is going smoothly and as planned, and the level of reserves in the system remains well above ample.  

Wo before I close, I’ll share my forecast for the other E, the economy. I expect GDP growth this year to be around 2 to 2 ½ percent. I expect the unemployment rate to end the year—at the end of this year to be around 4 ¼ percent, and thereafter to move gradually down to my estimate of its longer-run level of around 3 ¾ percent. With the labor market in balance, I expect the process of disinflation to continue. Specifically, I expect overall PCE inflation to moderate to around 2 ¼ percent this year, and then to be near 2 percent next year.  

Well, that’s my base case, but it’s important to emphasize that the outlook remains uncertain. And I’m attentive to signs of a shift in economic conditions. And three areas are particularly in focus. One is the possibility of a significant further weakening in the U.S. labor market. The second is a sharp down—sharp slowdown in global growth that could spill over onto our shores. And third, the experience of the past year shows that the process of disinflation is not always smooth and can surprise both to the upside and downside.  

So, we’ve come a long way from the unacceptably high inflation and overheated labor market that we experienced just two years ago. Monetary policy has been unequivocally focused on returning inflation to our 2 percent longer-run goal. The risk to our goals are now in better balance, and policy needs to adjust to reflect that balance. Of course, one clear lesson of the past several years is the future is highly uncertain. Therefore, our decisions will be data dependent, with a keen eye on the achievement of our maximum employment and price stability goals. Thank you. (Applause.) 

STEIL: Thank you, John. I thought I’d start our discussion with some big picture issues. And then we’ll get into some of the specific, more contemporary policy relevant issues that you talked about in your remarks.  

We’re in a presidential election season. As is not uncommon during such periods, the Fed is in focus. Not just policy, but the role of the Fed in managing the economy. One of the two major candidates, former President Trump, as you know, last month grabbed some headlines by suggesting that the president himself should be involved somehow in the formulation of monetary policy. I think he was probably referring to himself and not specifically to President Biden, but we can’t be completely sure on that front. But I’d like to get your perspective on the question of Fed independence. You’ve been involved in monetary policy now for many decades. What are your thoughts on the historical role of Fed independence, as well as its proper role in the management of the business cycle?  

WILLIAMS: You know, this is an issue that’s been studied a lot. It’s been—not only the United States, but I would say, you know, across the globe. And what I what I have seen, again, in my—I guess, now, my thirty years in my career, is a recognition, you know, not only here but around the world, that having an independent central bank—and I’ll be very clear what I mean by independent central bank—conducting monetary policy with clear goals, communicated transparently over time, really does support the effectiveness of monetary policy and the effectiveness in achieving those goals.  

Now, the goals that we were given and the institutional structure we have is set by the law, the Federal Reserve Act. And the broad goals, the price—maximum employment and price stability. And then our independence is about how do we best achieve those? What are the decisions we make within the—you know, the confines of what we’re able to do to do that. And I think that the argument for independent central banks in this context is not because, you know, we like it or don’t like it. It’s because it’s actually been proven to be effective. And that’s why I think there’s been such strong support around the world for independent central banks.  

If you look at whether the Federal Reserve, you know, which, you know, it’s independence, has evolved over our 110-year history, you look at the Bank of England, it got its independence—you know, shouldn’t do math in my head that fast—but, you know, just last few decades. We’ve seen, you know, the European Central Bank have very strong independence, and other central banks having that. And I think what we’re seeing is that, based on experience, based on, you know, very careful analysis, independent central banks are able—you know, best able to achieve the price stability and other goals that are set out for them.  

So, to me, it’s really a—you know, it’s really—it’s based on the experience and empirical evidence that this is a structure that has worked well. And most countries have adopted this. And it’s—you know, so it’s a constant reminder to me of the important trust that the American people put in us to carry out our responsibilities. So I feel like the Feds has been in the spotlight for quite some time, actually. But that is perfectly fine, because the work we do is incredibly important. And the best—if we can do—you know, accomplish our goals really well, that benefits the entire American people. And, honestly, given our role in the global economy and global financial system, it benefits the global economy as well. 

So we are—you know, all of us in the Fed wake up in the morning, focused on what can we—how can we best do our jobs? We’re not—you know, stay away from the politics, stay away from all that. Just focus on doing our work, making the best decisions we can, and then constantly reassess, you know, how the economy is performing and how to, you know, make decisions going forward. 

STEIL: Is that tougher to do in a presidential election season?  

WILLIAMS: You know, elections happen a lot. And, you know, I’ve been through, you know, presidential elections, congressional elections, lots of elections. I personally don’t think so. Probably not—you know, no one in this room is surprised, I spend most of my time either trying to analyze the data with our teams of experts, talking to business leaders, community leaders, to understand what’s happening. Just very much focused on the job that we have. It’s a hard job on its own to get this right and to do our very best and our responsibilities. And so I personally don’t find it any more difficult. I definitely get asked more about it in election years. (Laughter.) But it doesn’t change how I approach my work, or my colleagues.  

STEIL: OK. Let me follow up on that. There was an interesting indirect back and forth in July between the economist Nouriel Roubini and Treasury Secretary Janet Yellen over whether the Treasury was effectively, if not necessarily deliberately, involved in monetary policy through, what Nouriel referred to as, quote/unquote, “activist debt issuance.” That is, adjusting the maturity of debt issuance with some strategic purpose in mind. Do you personally have any concerns about the Fed and the Treasury tripping over each other’s feet, perhaps even inadvertently, in terms of managing rates at different points in the maturity spectrum?  

WILLIAMS: Right. Well, this is not the general issue about the decisions are made by U.S. Treasury about debt issuance and everything around that. This has been around for the entire history of United States. The issues that we have about how to best manage, you know, the stance of monetary product policy broadly defined to achieve our goals has obviously, you know, been around for a long time. You know, we do. We’re constantly engaging with our colleagues in Treasury to understand what’s happening in the—in that world. And they obviously engage with the private sector a lot about, you know, around thinking about debt issuance and things. 

That’s their responsibility, to make those decisions based on the objectives that they have and what they’re trying to achieve. For us it’s, like, many things, you know, you take the decisions of the elected officials in governments, not only here but around the world, as though kind of the environment that we’re operating in. And then we make our decisions. It is true that there’s a kind of a close, kind of theoretical connection between decisions that we have maybe—we make, in terms of the duration of our balance sheet, of our treasury holdings and the decisions that Treasury makes on issuance.  

But they have their own set of goals and objectives that they’re focused on. I think they’re very transparent—they are very transparent about that. And they’re carrying out a long-run strategy. And, you know, I think it’s fully articulated. And here, we’re just—we’re managing, you know, given what they’re doing, how we make our decisions. So there’s no—I don’t see this as a conflict or a stepping on each other’s toes. Think what is important is we all are, you know, doing our jobs as best as we can to accomplish our goals. 

STEIL: Given that the Treasury’s decisions in this regard do obviously affect the business cycle, the effectiveness of monetary policy broadly, does it at least create some communication challenges for you when you’re trying to do certain things with monetary policy?  

WILLIAMS: Well, you know, we—this is—you know, we had a similar thing when we were doing QE in terms of, you know, the decisions of the debt management, or, you know, those decisions. And we have—given that, you know, we’re making the decisions in order to achieve financial conditions the best—or fostering economic conditions to achieve our goals. So it doesn’t make it harder or easier? I don’t think of it that way. It’s just factors, like fiscal policy—whether state and local governments, federal government, anything. Those influence the economy. Those are things that affect what’s happening in the economy. And we have to sit there, analyze how all these things fit together, and how to best achieve our goals.  

I mean, when—I often get asked, well, how much does, you know, fiscal policy affect your decisions? I say, there’s a hundred things that affect our decisions—what’s happening globally, what’s happening, you know, in terms of geopolitical issues, or just, you know, events here or around the world. And we have to analyze that, take that in, and best figure out how to carry out our responsibilities. 

STEIL: In your set remarks, you had said at the end, and I’m quoting, “monetary policy has been unequivocally focused on returning inflation to our 2 percent longer-run target.” I want to talk a bit about this 2 percent inflation target, because obviously over the past three decades, really, it’s become a sort of global norm. But it’s not unquestioned, particularly during times of economic volatility, like during great financial crisis, during the pandemic. You have various commentators raising questions about it, whether it’s really optimal, whether we could do better.  

Some have suggested, for example, raising that longer-run inflation target to avoid problems associated with the so-called zero lower bound. Others have said we should be targeting things other than inflation, things related to prices but, for example, price levels rather than the inflation rate. Still, others have suggested that we should be targeting very different variables, like nominal GDP, or expectations regarding nominal GDP. How do you think about the 2 percent inflation target in the context of all these discussions going on about other targets you could potentially be— 

WILLIAMS: Yeah. You know, it’s a really important question. I will say, going back to my days as a graduate student, so I’m taking this back to the early ’90s, I mean, this was a huge discussion back then. You know, when the Bretton Woods system collapsed in the early ’70s, a huge—a question that central banks around the world were saying, well, how do we define, you know, nominal anchor, price stability, and how do we best do that? Because we had been in a—basically a fixed exchange rate regime. So this is an issue that’s been around, and an important issue, that’s been around for fifty years.  

But, as you’ve seen, this idea of what we call, you know, inflation targeting, that we’re trying to redefine price stability in terms of an average inflation rate and, you know, trying to achieve very low and stable inflation, this has become the common view, rather than price level targeting, or nominal GDP targeting, or other things. And I think there’s a very good reason for that, and a very good reason why 2 percent is a good answer. You said “optimal.” And in my world, given all the uncertainty and things, I’m not sure what optimal exactly is. But I do—I think it’s an answer that gets us a good balance between our objective of price stability and maximum employment.  

So, like you mentioned, if you have an inflation target that’s higher, that gives us more room to cut interest rates on average during a downturn despite the zero lower bound, or the lower bound. So that’s an argument for a little bit higher. At the same time, that’s— 

STEIL: And how do you respond to that? Yeah. 

WILLIAMS: Well, let me—but on the other side, if inflation is too high, that creates distortions in the economy. We’ve seen over the past few years that high inflation affects different families, different businesses, different parts of our economy very differently. And that’s a distortion and, you know, a negative thing that you don’t want to push too far. So those are some of the things that you worry about. Pushing inflation too low, you know, could create the risk with a zero lower bound. And also, we know from history to deflate—periods of deflation can be harmful to the economy.  

So to—my view is, you know, you could say there’s no perfect answer to this, but it is a balancing act. If we had an inflation target it was much higher than 2 percent, I think that would create a lot of distortions in the economy. It would reduce the—I would say the—you know, the kind of productivity and effectiveness in our economy. It would create uncertainty in our economy that’s unnecessary. If we went too low, I think it would create more problems around periods of very low inflation.  

So we’ve seen a lot of central banks in advanced economies kind of gravitate to this 2 percent for these very same reasons. I think the most important thing, and going back to when we first announced this in January of 2012, is that we have a clear objective that we communicate every single day. So is the optimal answer 2 (percent), or 2-plus-x or 2-minus-x (percent)? We could debate that a lot, or different frameworks around nominal—you know, different things. You could think about that. But what is really powerful is to say, we’re clear on what good looks like, what we’re trying to achieve. So that whole period where we had inflation, you know, 5 percent, 7 percent and coming down, everyone in the Federal Reserve and every communication we have said, we’re clear that that’s unacceptable.  

We’re clear that 2 percent is where we’re heading to. It’s going to be a—you know, it’s going to take some time to get there, for various reasons. But we’re not debating, like, what are we trying to get to? Everyone knows what we’re trying to get. And that’s one of the things I think, has been very helpful, both in the U.S. and Europe and other countries to keep inflation expectations well anchored. So we’re, you know, seeing market participants, and the public, business leaders, they think, yeah, inflation is going to come back down, the Fed’s going to do the right thing and to get inflation back down. And that tampers kind of an inflationary dynamic that we saw late ’60s and the ’70s.  

So, you know, I think that with some of these other ideas—which I have studied myself in my research days—I think they help us think about, like, the mechanisms by which, you know, inflation expectations affect behavior and monetary policy. I think that the clarity and the ability to communicate and kind of be driven by a very clear inflation goal is just very powerful. And some of the would it be a little bit better, or could you imagine certain areas where these other things would be better or worse, I think that that’s not as important as, I think, having this very clear and transparent goal. 

STEIL: Is it, in your view, harder to anchor inflation expectations, even with a target around 3 percent. I mean, as you know, some have been arguing for a target as high as 4 percent. But does it get harder to anchor inflation expectations?  

WILLIAMS: Well, I think—you know, first of all, some countries do have a 3 percent inflation target. Some emerging market countries have broader ranges. Given the experience they’ve had or also the volatility of prices in their economies, it’s very different economies than ours, I can’t say that that’s there’s a right or wrong answer. I mean, two things I will say. Over the last couple years, there is no question in my mind that people really—and for good reason—really dislike inflation. That 4 percent inflation was not like, oh, that seems fine. I mean, there was nobody—(laughter)— 

STEIL: We’ve probably forgotten about that.  

WILLIAMS: Nobody said to me, they, John, that 4 percent, or whatever, you know, let’s just go with that. So that was loud and clear. And I agree with that. And I think there’s reasons for it. It’s not just an emotional thing. It’s, like, price stability is incredibly foundational to a strong economy. So—and that’s why—you know, you go back to Chair Powell’s speech two years ago, this came across so clearly. And I agree, you know, I think that’s just a very powerful thing.  

So I can’t argue is one—you know, could you anchor inflation expectations to 3 percent? Sure, other countries have done that. I just think that as you move up that kind of ladder of higher inflation, this issue of, well, if you’re OK with four, then are you OK with six? Are you OK with something higher? I think it becomes more relevant. And, as I already said, there are already distortions. I think the other thing we’ve learned is that the two—in practice—so I’ve—you know, like you said decades. (Laughs.) You know, but I’ve—you know, I have been in the Fed for thirty years. And one of the things you’ve seen is the 2 percent inflation goal has served us well. I mean, when we had inflation of 7 percent I think it was incredibly powerful. And when inflation was running well below the target after the financial crisis, I think it also served us well in saying that we didn’t want inflation too low. So I think it—again, it’s kind of a Goldilocks kind of argument. It’s not too hot, not too cold. It’s got the good balance.  

STEIL: OK. I want to talk about one specific tool of monetary policy, which chairman—former Chairman Bernanke had particularly championed during the great financial crisis and was relevant in the early days of the pandemic—forward guidance. In 2022, the Richmond Fed had an interesting paper looking at the various issues involved in forward guidance. And I believe it was June of that year Chair Powell had also made public remarks indicating that going forward from that point, forward guidance would have less of a role in communication, that the Fed was going to be, quote/unquote, more data dependent.  

How do you look at forward guidance as a tool? Where is it helpful, and where is it potentially harmful? I ask that because obviously people in the markets like to know what you’re going to do tomorrow. (Laughter.) They want to know what you’re going to do next year and the year after. But you don’t have a crystal ball. Is there a risk that if FOMC members talk, say, too much about what they think they will be doing in the future, that they will then feel obligated to validate their past projections of their own behavior, because they don’t want to lose credibility with the market. How do you look at this? 

WILLIAMS: Well, I think the way you lose credibility is when you make decisions that don’t support the goals that you’ve set out. So I think that—you know, so I would never sit there and think, OK, a year ago I thought this is what was the right thing to do, so I should somehow hold myself to that. And you’ve seen us do this. I mean, we’ve—given what’s happened the last few years, the economy has performed very differently than people expected, you know, back in ’21, ’22, and since. And we’ve had to, you know, track—you know, be data dependent. And we—as the economy has evolved, and not just the data, but what does it mean for the outlook? What’s it mean for the risks of achieving our goals. So taking that totality of the data, the totality of all that, and saying we need to be able to be adjusting, you know, as we learn more.  

So I think that, you know, we don’t want to be in a situation where somehow our forward guidance or communications are hampering our ability to carry out our responsibilities. So going back to the issue that you mentioned about forward guidance, I mean, I think it’s just so situational. If you go back to 2011—I will use as example. I joined the FOMC in 2011. The challenge we had back then was that markets and most people were thinking, we’re going to start raising rates very soon. And we didn’t—as policymakers, we didn’t think that was the right answer to this question. So how do you communicate that?  

And it’s hard. And one of the things you learn is you can kind of talk about things and the message may not be heard. When we used the forward guidance that we used back then, it was heard loud and clear. It had this notion that we didn’t think we’d be raising rates probably for the next two years. I’m rolling back to 2011. So I think there were times where the understanding of the—you know, what—how the policy—how the FOMC is thinking about policy and what’s understood in the markets are out of sync or not—you know, not supporting our achievement of our goals, that forward guidance can be helpful.  

I think it especially can be powerful when you’re at the zero lower bound, or the effective lower bound, or in periods like the pandemic where the uncertainty is—or, you know, really wanted to have a clear signal early on, say, in 2020. So I think as chair Powell, you know, said, and I agree, as the economy is getting away from those kind of circumstances, you really do always want to be data dependent in the way I talked about, the way we talked about it, and not be used—not relying on forward guidance as much. I have to say, there’s always forward guidance. And we do have the economic projections we put out every—you know, four times a year. We have speeches. We have other ways of communicating how we’re thinking about the economy. But that’s not this kind of, maybe, explicit, like, here’s what we’re going to do on policy kind of guidance.  

So I think that’s healthy to have that discussion, you know, the broad discussion about how we’re thinking about the economy, what’s that mean for policy? But in a more normal period of time, we don’t—it’s not as useful to try to be very explicit about, well, like, this is what we’re thinking about policy. So I think it’s got to be situational. It’s got to be, you know, good judgment. You know, in the end, I think we’re always going to need to be data dependent and be driven by the achievement of our goals. So I don’t think it’s right or wrong. I think the times we’ve used a strong forward guidance or others have done that it’s because it’s been a situation where that was seen as particularly useful. In other situations, you don’t want—you don’t want to use it that way.  

STEIL: OK. Last question from me. You referred in your remarks to your dual mandate. Over the better part of the past three years, we’ve had many discussions on monetary policy here at the Council, including with your colleagues in the FOMC. And the focus, naturally, was overwhelmingly on one side of the dual mandate. And that was price stability. We did, of course, have discussions about the labor market, but that was mostly from the perspective of inflation. Is the tight labor market, for example, contributing to inflation or not? Over the past three months, that public discussion clearly shifted. Chair Powell, in particular, has explicitly emphasized that the FOMC is looking at the other side of the dual mandate, specifically maximum employment. He was even clear enough that he wouldn’t welcome further weakening in the labor market. How are you thinking about that dual mandate? And, at this point in time compared to, say, a year ago, how you weigh that mandate in terms of your thinking about appropriate monetary points? 

WILLIAMS: Right. Well, so from my perspective, the dual mandate—the goals are set in the Federal Reserve Act, and how we’ve articulated those in our communications around our understanding of our longer-run goals, policy strategy, that’s cemented in place—2 percent inflation, maximum employment. And that hasn’t changed. That hasn’t changed, even when inflation was very high. The goals we were trying to achieve wasn’t changing. What was changing was the—kind of the distance from those goals. And I’m using my hands to describe this. So, you know, in 2022 what we saw was a red-hot labor market. So from a maximum employment point of view, if anything, the labor market was very tight and not consistent with a sustainable level. And the inflation was very high.  

So it’s not that our goals had changed. It’s the situation was inflation was far from our goal, maximum employment was, if anything, you know, we were in a very hot labor market. So as these past few years have transpired, as inflation has gone from 7 to 2 ½ (percent), as the labor market has gone from the hot—you know, kind of the tightest labor market in decades to one that looks more like the labor market in the period before the pandemic, then the goals haven’t changed but the situation we’re in has gotten, like I said, in closer balance. So from a monetary policy point of view, if you think about it that way, of course we were very focused on inflation. It was 7 (percent), and the unemployment rate was in the mid-threes.  

And now, as with the unemployment rates in the low fours, inflation’s at 2 ½ (percent), the balance between achieving those two goals is getting—is now, you know, much closer. Or, you know, as I—as I talked about equipoise. So it’s really about how do we best achieve not only the 2 percent inflation, the price stability was absolutely essential, just foundational, but do it in a way the best we can to maintain an economy with maximum employment. So that—so, again, I think that the reason we’re talking more about the maximum employment part and the importance of that, it’s just the situation we’re in. The two goals are closer to their kind of what we think of as achieving what we’re trying to achieve. And we just have to get that—keep that balance. Get inflation to 2 percent, and do our best to maintain maximum employment. So, you know, I think that this, to me, is the importance of having very transparent goals in monetary policy, very transparent strategy, because we’re not shifting the goalpost of things. It’s really just following the data, the evolution of the economy, and adjusting policy based on that. 

STEIL: Well, you referred to the data. At 8:30 this morning we had a jobs number, which the market has been very focused on lately. That number was 142,000. I believe that is the U.S. economy created 142,000 jobs last month. Of course, that’s going to be subject to revision. That was about 20,000 below market expectations. What are your initial thoughts about it? 

WILLIAMS: Well, my initial thought is I want to see this data a lot more closely and carefully, which I think is probably the response of most people in this room who do this. And obviously, go to the team—the experts, and go through all this.  

But the second point is, you know, I think that the data today, just at a rough cut, is consistent with what we’ve been seeing, a slowing economy, a bit cooling off in the labor market. But in the broader context, we—like I said in my comments—that we look at the totality of all the indicators. And we’re seeing a pretty common trend in this. We’ve seen the, you know, job vacancies come down from you know, extraordinarily high levels a couple years ago. We’re seeing other indicators around quits and transitions between, you know, unemployment and employment. A lot of other indicators we look at that are kind of moving over time to closer balance and, as I said, to conditions that, you know, prevailed in the period before the pandemic.  

So I think that what we’re seeing is a consistent signal of cooling. You know, we—you know, we want the economy to be in balance and stay in balance. So we don’t want to get out of balance in either direction. And that’s really important from, you know, achieving maximum employment. Again, it’s about looking at the entirety of the data, understanding how this fits into our objectives, and then as an input into thinking about how policy should be made. But, again, just to reiterate on this, you know, we’re—you know, we want to—the goal here is really to have this balance and achieve both a labor market that’s in balance and consistent with maximum employment and price stability.  

STEIL: OK. I’m going to open up the discussion now to our participants, physically in the hall and virtually. When I call, I know— 

WILLIAMS: All the people I know are the fastest to raise their hands. (Laughter.) Very impressed. (Laughs.) 

STEIL: When I call on you, could you stand up, wait for the microphone, tell us who you are and, where relevant, what institution you’re representing. Please keep your questions as precise as possible so I can get in as many as I can. And I just want to remind everybody that this meeting is on the record.  

Paul. 

Q: Paul Sheard. Great remarks, John. 

I don’t want to put you on the spot here, but both political candidates for president seem to be saying that they would like to see the overall cost of living, which we might think of as the inflation rate, to come down significantly. Now you might say this is exactly why the Fed’s independence is so important, but how does the Fed think about that issue of after period of sustained above target inflation would you sort of tolerate a period of below target inflation? Would that be welcome? And how does that kind of fit into the average inflation targeting framework, which sort of still seems to be there?  

WILLIAMS: Right. I think that—I’m not going to speak about what political figures, you know, are saying. But we definitely—“we,” I hear the, you know, the very real concerns about the cost of living, especially around housing and other aspects of life that, you know, are not only very expensive, but have become more expensive over the past few years. So I think that this issue of affordability is very real, and understandable that people are focused on it. I think from a monetary policy point of view we have this—you know, set out a framework to set—you know, have 2 percent inflation. Yes, on average, but over—I think of this is on average over a longer period of time. Also, we set a framework that specifically said we want inflation expectation anchored at 2 percent. That is stated in our long-run goals, the document.  

So I think, from my perspective, you know, I’m just focused on let’s get inflation back to 2 percent. We’re not there yet. I mean, we’re 2 ½ (percent). We’re moving in the right direction. We’re not there. And let’s make sure we keep inflation around 2 percent. Now, obviously, it’s going to fluctuate. It can fluctuate around that because of various things that happen. But, from my perspective, our job is to get—you know, just to get inflation back to 2 percent and create an environment of low and stable inflation, with inflation expectations anchored at 2 percent, that provides a strong foundation. That’s how I am thinking about it. I don’t think this is—you know, is not—the last few years is definitely not a time for me to think about, well, how do we shift our strategy, or something like that, around price levels or something. Let’s just get—let’s get the job that we have in front of us done as well as possible.  

STEIL: Yes, here in the front. 

Q: Thank you. Krishna Guha with Evercore Partners. John, great to see you and thank you for your remarks.  

I could sort of think of what you said, and colleagues have said, is the Fed roughly now has the labor market it wants and doesn’t want to see it weaken any further. But you also say that policy is restrictive. And it certainly looks that way if you use any kind of benchmark, sort of Taylor rules, or other methods of approximating where policy should be. So the market worries that you’re behind the curve, that if you are restrictive then why shouldn’t the labor market continue to weaken? What’s wrong with that analysis? And if it’s roughly right, why isn’t there more urgency to get back to a more neutral setting more quickly? Thank you.  

WILLIAMS: Did you say this wouldn’t be a leading question or not? I can’t remember. (Laughter.) You did not. I didn’t think you did. Well, I think, you know, I mean, obviously we do want to achieve as best we can maximum employment and achieve the 2 percent inflation over the next year or two. So we got—you know, there’s two things that we’re, you know, very focused on making sure they’re happening. And there’s a lot of uncertainty in the economy. You know, no surprise there.  

I think, you know, the economy continues to grow. You know, I mentioned my forecast is somewhat above 2 percent growth for the year. I think, you know, overall the economy has stayed on a very good trajectory. It’s true that the labor market has cooled. In my view, is the argument for dialing down, I think is the term I use, of the level of restrictiveness in policy, is because we do want that—or, I want to see the labor market remain, you know, in balance, and not overshoot too far. The question of, what’s the—you know, how to best achieve that, it depends on all the factors, and looking at all the various data, and, you know, assessing all that. 

Hopefully, you know, I think—I personally think we’ve got monetary policy positioned well, and on a kind of a path forward that can keep that balance and, you know, achieve the 2 percent inflation. But, like I said, we have to be able to be—we have to stay in the data dependent mode. We have to stay focused on what are the data telling us, what’s it means for the economic outlook, and then, maybe most importantly, what it means for the balance of risks to achieving that? So that’s—I feel like we’re well positioned for that. But, you know, it’s really about making the best decisions we can to achieve it. 

STEIL: Rebecca. 

Q: Thank you. Hi, John. Good to see you. And thank you for your remarks. Rebecca Patterson. 

So when I reflect on some of the mistakes from the tightening cycle made by Fed members, but also economists, market people, it was underestimating the transmission and the fact that there were so many businesses and households that had locked in very low rates. So raising interest rates didn’t affect them the same way they had in past cycles. Now we’re on the cusp of an easing cycle. And I’m wondering the same questions, how will the transmission work? And I know it’s only one channel, but when you think about housing, according to Freddie Mac we have 60 percent of mortgages 4 percent or below. So that could slow down the wealth effect created from an easing cycle. I’m just wondering, how are you and your colleagues thinking about the transmission of an easing cycle in the current environment? Knowing that there’s a lot of other variables that matter.  

WILLIAMS: Yeah. So I’ll speak for me, because, Rebecca, you did see you and your colleagues. So I’ll just be clear, I’m always speaking for me.  

I think your point is spot on about, you know, the stock of outstanding mortgages that have very—were financed at very low rates clearly affects that one part of the channel monetary policy, which is when we—you know, typically, when you think about when you lower rates, like last cycle, a lot of people refinance. That, you know, can be a channel that boosts the economy. So I think, you know, from my perspective, we’re aware, I’m aware, that that channel did not play as big a role for the reasons you said. And we have all that data. We know how that works.  

I think the other channels of monetary policy do, you know, work in their normal ways. And maybe some more—a little bit more powerful, some less. We spent a lot of time trying to study is monetary policy more effective or less effective this time or not? I think it’s really hard to say empirically, right, because our estimates of what the effect of monetary policy actions on the economy are uncertain, even in best—you know, in normal times. I do think that that channel is not as present, both on the tightening and at least initial phase of loosening. So something that they have to take into account.  

But, you know, I go back—I’ll broaden the question a little bit. There was a lot of debate going on in the last year, past year. You know, is policy restrictive? Is policy working? I mean, I think that debate should be over. Policy clearly—you know, taking Krishna’s framing of his question, clearly—along with all of the other things that happen. I should be very clear about this, there’s big things happening on demand and supply in the U.S., around the world. But the monetary policy part of it, I think, played a role in kind of bringing demand closer to supply and helping the economy move into better balance, bring inflation down.  

So I think monetary policy is clearly—is working, you know, generally, as you would expect. But we do have to be very, you know, cognizant of some of these specific channels that may not be as powerful. So that’s how I would answer your question. That’s why, you know, we do a lot of careful analysis on these things. But the other channels of monetary policy, I think, you know, generally, you know, working as expected.  

I know you didn’t—you were very careful not to say this, but I think sometimes other comment—other comments I’ve heard is monetary policy only works through interest-sensitive sectors. Well, monetary policy works, you know, much more broadly on the economy. It hit—it affects the interest-sensitive sectors maybe sooner or maybe more—in a more prominent way. But you have what we would call general equilibrium effects, and effects on the broader financial conditions and broader economy. So it’s not just through the interest-sensitive sectors. It’s much broader. 

STEIL: Brianna, we have a virtual question? 

OPERATOR: We will take our next question from Peter Hooper. Mr. Hooper, please unmute your microphone.  

Q: Yeah. Thanks very much, John, for your remarks.  

I wanted to follow up a question on the one that Krishna asked earlier. What is your current thinking about just how restrictive policy is? How much are rates, perhaps, above neutral levels? And in light of the lags in policy, how quickly do you think we should be thinking about returning to neutral under the sort of general outlook that you gave us here?  

WILLIAMS: So thanks, Peter. I think, you know, a couple of comments. One is, I think when you think of neutral—I feel like I’m normally the person that says, finally the R-star question, right? (Laughter.) But I’m not going to actually do that today. When I’m thinking about neutral for policy, it’s in the context of all the shocks, or all the factors, influences on supply and demand. And for the U.S. economy, we’ve gotten huge tailwinds on the supply side, both on in terms of labor force growth over the last couple years and in terms of productivity. So it’s not just, you know, about is—you know, is—the way I put it, is the real interest rate above R-star or not, and how much? It’s really about understanding the role of monetary policy in the context of a whole set of kind of developments that were affecting supply and demand.  

One of the reasons that GDP grew over 3 percent last year was, you know, very positive supply shocks that were boosting the ability of our economy to grow. Without those we—you know, I don’t think we would have seen the 3 percent growth. But going back to your question, I think my view on the restrictiveness—the stance of policy is in the—in the near term, over the next year or two, it’s really more about the context of is monetary policy helping maintain—well, restore and maintain the balance in supply and demand, and achieve the 2 percent inflation. So it’s not an R-minus, R-star kind of calculation. And I think there are still significant tailwinds on the supply side of the economy that will support growth.  

Now in terms of the longer run issue of—you know that you’re asking, like, you know, not only, you know, what’s the ultimate kind of level of interest rates and how quickly you need to get there, my honest answer, I mean, seriously, is I don’t know. And that’s why, you know, this—it’s got to be—it’s not sitting there thinking, well, R-star is X, and R is this, and the real interest rate R, and that we have to figure a path between. It’s really about what is—what level of interest rates, you know, will best achieve these goals? I think it’s lower. Over time, it will be lower than where real interest rates are today, because I think the policy is restrictive. Exactly what the right path of interest rates will be has to be driven by the data.  

I’m not—I’m not sitting there thinking it has to have—it’s at one speed or another or kind of can be described in words that way. It’s got to be driven by the data, the outlook, and the balance of risk. Obviously, in a—you know, we’ll be—the FOMC will be putting out our economic projections to provide at least a view—a view or a lens into the base case views of my colleagues and staff—my colleagues at the FOMC about how they’re thinking about that. But I would just double underline the “base case.” That’s what we’re asked, at the SEP. You know, what do we think is, you know, monetary policy—what’s appropriate policy kind of I think of the modal scenario.  

So I think that will provide—that provides some information about that. But information—(off mic). 

STEIL: In the back. 

Q: Thank you for your comments. Andrew Watrous with Morgan Stanley. 

You’ve mentioned in your comments that you see the long-run rate of unemployment at 3 ¾ percent. And over the last couple of years, we’ve seen a large increase in labor supply, due in large part to immigration. And I wonder if you could say a few words about how you think about estimating NAIRU in light of immigration trends. Thank you.  

WILLIAMS: That’s a really good question. Like all the questions, really good questions. I think it’s something that obviously the economists in the Fed and elsewhere are looking at. My view—the fundamental driver, in my view, that there is a kind of long-run unemployment rate that’s historically low is really around the broader demographics of the of the labor force and how that’s evolving over time. Which is, you know, when I started in the Fed, you know, a lot of views of the natural area of unemployment or NAIRU were probably more in the 5 ½, 6, or maybe even higher than that, percent, given the demographic of the labor force, and things like that. Today, I think it’s driven much—to a much lower number, but with big uncertainty bands.  

I think the issue of—as we get more information about, you know, the people who have been added to the labor force through immigration and other changes in labor force participation, that will obviously inform my view. You know, when you think about demographics, it’s really thinking about what’s the typical or average experience of different groups in terms of spells of unemployment, you know, a probability of unemployment, and taking that into account. So at least from my perspective, this is an issue that, you know, is relevant. My own view is it hasn’t fundamentally raised the long-run level of unemployment yet, but it’s—again, it’s the kind of thing that we’d need to analyze as we have better information. Right now, though, I think that the big picture on the demographics of the labor force are still the same as before. So my view would be about 3 ¾ percent, for the natural rate of unemployment. 

STEIL: Joe. 

Q: Joseph Gasparro, RBC Capital Markets. Benn, great conversation, as always. John, thank you for your continued leadership.  

We talk a lot about lowering rates based on inflation. How much time do you spend thinking about a potential geopolitical scenario or a potential, you know, credit cycle that could influence rates? Thank you.  

WILLIAMS: Yeah. So the question on scenarios is really good. I mean, for those of you who are really insiders to central banking, you know, former Chair Bernanke had done this report for the Bank of England which was really, you know, emphasized a number of things, but emphasized the importance of scenario analysis both internally but also and maybe—you know, as part of communication. And we tend to—there tends to be a lot of focus on the modal outlook, and dot plots, and things like that. And I think the scenarios are really important.  

So on the—so to answer your question, you know, we do a lot of scenario kind of analysis around geopolitical events, around other kind of things. Some of them are very, you know, typical macro, what happens if productivity growth is faster or slower, things like that. But also thinking about situations that, you know, may impact the U.S. economy or global economy, and understanding the channels by which that would affect, at the end of the day, the achievement of our maximum employment and price stability goals, and what it would mean for monetary policy.  

But I think scenario analysis is very important. We do a lot of that. You know, one of the challenges to it is you’re dealing often with the unknown unknowns part. Like, well, what happens if? Now, if you ask me what happens if oil prices were to rise by X or fall by X, we got a lot of empirical evidence, a lot of modeling that we can do that kind of answers that. But what happens in the real world is not just oil prices move by X, or minus-X. It’s going to be a set of circumstances that caused oil prices to change, and things. So we’ve done, I think, a much better job of focusing on what could be the drivers that would drive commodity prices more broadly, and therefore affect, you know, EMs and, you know, other parts of the world, and how that fits together.  

And a big question—you know, big point on this, and I made the comment of slowing global growth, you know, is China, and how does it evolve in terms of its own growth, but then its effect on things like commodity prices and financial conditions? So we do a lot of that analysis. All the things that you mentioned, and many more. I think the point of this is not to tell us, oh, we’ve got playbook, what happens if, what happens if that? But more understanding, like, what are the important mechanisms? Some of the shocks that happen in the world probably don’t hit us very hard in the end. We’re a big economy. We’re not—we’re an open economy, but not as open as some. But we—making sure we understand all that. 

STEIL: Right here. 

Q: Thanks, Benn. Andrew Siwo, Cornell University. 

John, how will tariffs affect the Fed mandate? More specifically, domestic energy independence seems to have wide appeal, though typically tariffs work when there is a viable domestic option. And, as it relates to renewables and input and supply chain, that appears to be quite challenging here. Your thoughts would be appreciated. Thanks.  

WILLIAMS: Yeah. Well, no one will be surprised, I will start with the sentence it says I’m not going to comment on any proposals or discussion around anything in the political sphere. I do think that, looking back to where, you know, tariffs were increased, you know, back—let’s see, six years ago or so, you know, we definitely see, you know, effects on prices. One of the less—and exchange rate, and things like that. I think one of the lessons of that, though, is, you know, directionally our understanding of how these affect things seems, you know, I think, pretty accurate. At the same time, there’s just a lot of uncertainty. It depends on the state of the economy.  

And so if you think about, you know, any kind of shock to the global economy or things like this, it really—the answer to your question is how would it affect things? And in your specific question around, you know, renewable energy and things, I think really depends on how tight those markets are, what are the substitutes, and things like that. So my comment is, you know, really it’s very situational in terms of what those effects would be. There’s a lot of research about this. And, you know, I point people to that. Going back to from a monetary policy point of view, I would put it back in the—you know, the way I answered your question is, like, there’s a lot of factors that can influence the economy, that can affect our—you know, inflation, can affect the labor market. Our role is, given those decisions, given what’s happening, it’s just to do our very best to achieve our goals. 

STEIL: Ed. 

Q: Ed Cox, Committee for Economic Development. 

My question is about quantitative tightening. After a long period of quantitative easing, the Fed is doing quantitative tightening, about 100 billion (dollars) or so a month. Then it got cut back to 50 billion (dollars). How does that impact your tools that you have available to implement your dual mandate?  

WILLIAMS: Yeah. You know, it’s great question. One thing—I gave it two sentences, I think, in my prepared remarks, Ed, because it’s going very smoothly. That’s happening. Kind of we—again, getting back to, you know, we use the tool of quantitative easing, buying treasury and MBS—treasury securities and MBS during the pandemic. We stopped those purchases. And now we’re letting those assets roll off our balance sheet over time. I think it’s an important point of how we’ve approached that each round, when we did it after financial crisis and this time, is to use the tools when we thought appropriate, put them—kind of put them away when we’re done.  

That takes time. We don’t want to be disruptive to markets. We want to do things in a smooth way. That has been working—you know, going very smoothly. I guess my answer often to the question, how much is the QT, like, tightening financial conditions right now when, you know, clearly, as we’ve been discussing, we want to kind of move to normalizing policy? You know, my view is a lot of that is kind of already built into the market. The market—you know, the markets understand what we’re doing. Nobody knows exactly, you know, at what point we’ll stop, because that’ll be driven by our analysis of, you know, are we in the sample reserves kind of region. But I think, you know, a lot of the effects maybe on long yields and things. Those are already built in.  

Yeah, honestly, this is one of the most uncertain, kind of, empirical kind of questions. Like, how big is the effect of QE, QT on markets? We have models. We have analysis. Those estimates range widely. I would just say it’s—whatever the effects are, those have already mostly played through. And the fact that we’re shrinking the balance sheet is not having—is not in any way interfering with our ability to make policy—achieve our policy goals. In our long-run goals and strategy document, we do highlight that the Fed funds rate, the target Fed funds rate, is our primary tool of monetary policy. So that, you know, the shrinking of the balance sheet is occurring in the backdrop. The tool that we’re using to try to best achieve our goals, the primary tool, is the Fed funds rate. And we have quite a bit of room, obviously, to adjust the Fed funds rate to achieve them.  

STEIL: If I could just piggyback on that to close. You may find this characterization unfair, but— 

WILLIAMS: (Laughs.) OK. 

STEIL: I’d like to hear that, when the Fed engages in QE as a means of stimulating the economy, FOMC members tend to emphasize it, make sure the public understands what’s going on, what the role of QE is. When the Fed does the opposite, QT, FOMC members tend to downplay its role in monetary policy, trying to convince us that it’s really a matter of technical, in the background, balance sheet management. Is there an asymmetry there, perhaps? 

WILLIAMS: Yeah. Yeah, there is—well, I think there’s a substantive asymmetry. There’s been quite a bit of research. And recent—earlier in the year, there was a paper on this. That some of our QE actions absolutely, primarily were to deal with this function in the financial markets. If you go to, you know, the financial crisis and their QE1—I guess it wasn’t called QE1, but it became QE1. But if you looked at our purchases in the spring of 2020, I mean where we were doing massive purchases due to disruptions in the treasury market and adjacent markets, I mean, that’s QE, yes, but it really is having a much outsized effect because the markets are dislocated. So part of it is getting the markets back to functioning well. And that could be a big effect. And then the rest is maybe what we think of as the kind of normal QE effects, which is basically taking duration out of the market. That pushes up the price of these securities because there’s less supply. And then that’s pushing the yields down.  

So the—I think in the periods of market stress and dysfunction, you get this big kind of normalization effect, which is, you know, going back to 2020, was incredibly powerful. And then for the rest—so that’s just normalizing. So you’re not expecting a reversal of that, because it was the shock that drove it up—the spreads up, and now we’re bringing them down. But I think that, yes, we do, I admit it, we talk about QE when we’re doing it to make sure people understand, and to be transparent about what we’re trying to achieve, knowing that over—and act, you know, very strongly when we’re doing it, knowing that as we reverse that and get back to normal we’re doing in a way that is less—to minimize the disruption to the economy and the achievement of our goals.  

Again, it’s the reason you’re doing QE. You’re doing QE either for market dysfunction, or you’re doing it because the—you’re at the lower bound, and you need an extra boost to the economy to get us back to full strength and get inflation to 2 percent. You’re doing it for different reasons. Now we’re just trying to, in a way, get back to our normal balance sheet. 

STEIL: OK. We’ve come to the end of our time, regretfully. Remains for me to invite you all to join me in thanking President Williams for a very stimulating discussion. (Applause.) Thank you. 

WILLIAMS: Thank you. 

(END) 

This is an uncorrected transcript.