Federal Reserve Bank of New York President John Williams said longer-run inflation expectations remain stable despite the recent surge in prices, but there is greater uncertainty over the future path for price gains.
“The news is mostly good -- longer-run inflation expectations in the United States have remained remarkably stable at levels broadly consistent” with the central bank’s goal, Williams said Wednesday on a conference in Zurich organized by the Swiss National Bank, the Fed and the Bank for International Settlements. “Inflation uncertainty has increased, but this does not appear to be due to unmoored longer-run expectations.”
Fed officials are aggressively raising borrowing costs in an effort to tame the price growth running near 40-year highs. The US central bank hiked interest rates by 75 basis points for the fourth straight time last week, bringing the target for the Fed’s benchmark rate to a range of 3.75% to 4%.
Fed Chair Jerome Powell told reporters after last week’s meeting that rates could go higher than officials previously expected, but hinted that policymakers could use smaller moves to get there. Investors are leaning toward the Fed downshifting to a 50 basis-point increase when officials next gather in mid December.
Williams did not comment on his outlook for the US economy or monetary policy. “I think delivering low and stable inflation is the most important thing we can do,” was his only remark.
Powell and other Fed officials are concerned that the longer inflation remains elevated, the more it risks becoming entrenched in consumer behavior. If households begin to expect higher inflation, that could lead them to demand higher wages and make other changes that could make it more difficult for officials to tame price increases.
Anchor ‘Bedrock’
“The importance of maintaining well-anchored inflation expectations is a bedrock principle of modern central banking,” Williams said. “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.”
The Labor Department will issue a fresh reading on the consumer price index Thursday morning. Analysts polled by Bloomberg expect prices to have risen 7.9% in the 12 months through October versus 8.2% the month before. The report will be the first of two monthly updates on CPI that officials will receive before the conclusion of their Dec. 13-14 meeting.
The Fed aims to achieve 2% inflation over the longer run measured by a different gauge -- the personal consumption expenditures price index -- which rose by 6.2% in the 12 months through September, the most recent month for which data are available.
During a question-and-answer session after his speech, Williams discussed the importance of Fed communications in shaping expectations, and explained models that officials use in gauging them.
Inflation in the US is “clearly far above our long-run goal,” he said, adding that it is “very important” that the Fed delivers on returning it to 2%.
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