The Federal Reserve's rapid pace of rate hikes, along with quantitative tightening, have started to lower demand in the U.S. economy, New York Federal President John C. Williams said Monday in an online speech hosted by the Economic Club of New York. And while housing activity has dropped and consumer and business spending have slowed, "the labor market remains remarkably tight," as hiring remains robust and wage gains continue, he said. With economic growth slowing, though, he expects the unemployment rate to increase from its current rate of 3.7% to between 4.5% and 5% by the end of 2023. A number of factors are improving in regard to inflation, he said, including easing of supply chain bottlenecks and other central banks tightening policy. "Because many of the sources of inflation are global, these policy actions from around the world should alleviate supply-chain issues, speed the process of restoring balance to global supply and demand, and reduce global inflationary pressures," Williams said, according to prepared text for the speech. He expects inflation to slow from its current rate of over 6% to between 5% and 5.5% at the end of this year and to between 3% to 3.5% next year. It will take longer to bring underlying inflation, what he refers to as the "inner layer of the inflation onion," to come down, he said. That part includes wages, services inflation, and inflation expectations. "Tighter monetary policy has begun to cool demand and reduce inflationary pressures. It will take some time, but I am fully confident we will return to a sustained period of price stability," he concluded. (Updated at 12:02 PM ET). In the Fed's latest policy statement , on Nov. 2, the U.S. central bankers hinted they may be open to smaller rate hikes at future meetings as it takes into account rate increases already taken, shrinking of its balance sheet, policy at other central banks, and monetary policy lags. Since March, the Fed has raised its key rate by 375 basis points to 3.75%-4.0%. Update at 12:19 PM ET: In the post-speech moderated conversation, Williams said, "my baseline outlook does not foresee a recession occurring," though there are a number of downside risks. But he also noted that economists do not have a good record of forecasting recessions. He expects that the Federal Reserve will need to raise rates further and that policy will need to stay restrictive through 2023. 12:23 PM ET: In addition, he sees a path where the central bank reduces the nominal policy rate in 2024. 12:48 PM ET: Regarding cryptocurrencies, Williams still questions its use to serve the basic purposes of money. While the technology may improve efficiency and speed of payments, he doesn't see crypto being used for store of value or basis of exchange. He repeated his view that stablecoins need a "strong regulatory framework," and that should be done "sooner" rather than later. In addition, the Fed is studying the potential for a central digital bank currency, but is nowhere near making a decision on that. He comes back to "what problem are we trying to solve with CBDCs." Like in Monday's talk, in October Williams compared inflation to an onion, comprised of layers.
