New York Fed President John Williams Talks Anchoring Inflation Expectations
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A short time ago, the Federal Reserve Bank of New York President John Williams said keeping inflation expectations anchored near policymakers' target forms the bedrock of central bank policy. A warm welcome to all of our TV viewers, but also to our radio listeners. We're here in Reykjavik, and I'm delighted to be joined by President Williams. Thank you for joining us. There's a dual mandate at the Fed. We all heard also Jay Powell on the FOMC not cutting rates.

You're putting firmly the focus on inflation. Why now? Well, first of all, we do have a dual mandate of maximum employment and price stability, and these are both very important. But one thing we've learned from history is that having well-anchored inflation expectations, having the public have confidence...

that regardless of whatever's happening today, that inflation will come back to 2% and that we'll make sure that happens is very important for price stability and also for economic stability. It helps actually reinforce our ability to achieve both of our goals. And given the uncertainty, given the experience of the past five years, it's been very important to keep inflation expectations anchored. That has been successful.

It's really important to keep them that way in the future. But given the uncertainty on tariffs and trades, how difficult is it to even have a projection for inflation in the future? Well, right now there's a lot of uncertainty about what's happening with trade policy or other policies. So for me, what's important is think through a lot of different scenarios

Right now the economy is in a really good place in the US. Unemployment is 4.2%, inflation is 2.3%. The other indicators show we're still a pretty solid economy. So right now we have time. We're in a good place now. Policy is in a good place. Let's collect more data and information about what's happening with trade policy, what's its likely effects on the economy.

And then once we have that more information, we can kind of think of, do we, you know, what's that mean for the achievement of our goals and our policy? I know you don't like when people say, look, the Fed seems unwilling, actually, because of inflation, to act preemptively to bolster the labor market. So how would you explain, you know, this contrasting in the future? Well, right now, again, the labor market has proven to be resilient and strong, even through the data through April.

So, what we want to do is really get an idea of what the tariffs are going to be, other policy decisions, or run these through different scenarios through our models and our analysis. Listen to what business and other leaders are telling us what they're actually doing in response to these policies. And then come to a view of what's happening to employment, inflation, and importantly,

the risks to that outlook. So once we have that better information, we can assess the situation and make decisions. So it's about getting the information so we understand the direction of travel for the economy and make the best decision possible. But right now, things are still quite in good place.

If there's a sharp downturn actually in unemployment, but you're still worried about inflation, does it mean that Fed cuts will have to be quite aggressive quite quickly? It's really hard to speculate on what would you do if this situation happened or that situation. I mean, where we're in a situation, which we could be in, where inflation is higher and unemployment is higher, we need to balance the achievement of both of those goals. We need to take actions that we think will bring the economy back to 2% inflation and

uh... achieve maximum employment as well as we can while anchoring inflation expectations so it really depends on what happens what how did the data change and also kind of how long the inflationary effects say of tariffs seem to be lasting right now we can theorize

what may or may not happen. Once we have more information, we see how that's going through the economy, then we can make more informed decisions. Yeah, and I know it's difficult and we don't want to speculate, but the market is speculating. The market is expecting, at the margin, one cut this year. Are they more or less right? Well, I don't like to say the market's right or wrong. I think the market participants are doing exactly what

we're doing. They're analyzing, they're looking at the data, they're looking at the announcements, they're analyzing that. One of the things you definitely see in the market pricing in the U.S. is kind of the modal kind of forecast for interest rates is a relatively gradual decline of interest rates, reflecting the economy doing reasonably well. But they also, market participants are thinking about what happens if the economy weakens more, and that would call for more rate cuts in that environment. So they are

having to think through that. They have to kind of guess what may or may not happen and make those decisions. But right now, we're just, it can be focused on what we're doing today and really think through all the different scenarios so that we're ready as we get more data to kind of know what to do

how to interpret the data and eventually what we may need to do. And it is scenarios, it's not like two, three data points. It's actually trying to understand the picture because I guess the outcomes could be so wide. Right, and again, with a focus on unemployment and inflation. But with tariffs, as a specific example, it really depends on which countries, which goods. It depends on a lot of different factors. There is no one rule that says a tariff of X causes inflation of Y.

So luckily in the Fed and of course elsewhere, we have a lot of experts who have studied this for decades. They've looked at past episodes and done a lot of careful analysis. But one of the things you learn from that is the answer you get depends on how good the information you have. So we're going to have to see, obviously, the trade policies are very much still in flux. That's changing. We're going to keep watching that trend.

Those developments, along with everything else that's happening in the global economy, it's not just about trade policy, and then take it from there. How's the U.S. consumer doing? Well, it's interesting. The U.S. consumer never lets us down, I mean, really. There's a lot of predictions of weakness back in 2022 when we were raising rates quickly, that the consumer would finally balk and slow down, and they continue to be.

consumer spending continued to be good. I mean, clearly, again, this is kind of the line between the hard data and the soft data. The actual consumer spending has held up pretty well, but we are hearing more reports from businesses and others that consumers are starting to pare back some of that discretionary spending. We do think that consumers did load up on some

imported goods early in the year, because before tariffs hit, we know businesses did that, that's for sure. So there was a bit of that behavior. So people are definitely, again, I think the consumer has been pretty healthy, but has also been kind of preparing for what happens if tariffs come in. President Williams, you've done such really significant work and research on neutral rates.

How important is it actually in all of this uncertainty to have that in mind? Well, I would say to me, again, I spent a lot of my life studying this, so I am going to say it's important. It's important as a way of thinking about what's a normal interest rate. When we think about where our interest rate is today, you want to compare it to something that's normal. So I think having this idea of a long-run neutral interest rate is an important thing to kind of have in mind.

But in terms of my meeting to meeting thinking about what's the right setting of interest rates, that's not what we're thinking about, or at least I'm thinking about. What you're thinking about then is what's happening with employment inflation and the risks to achieving our goals. So it's something I think is conceptually important to have in the back of your mind, but it's not the thing saying what you need to do on a given day.

Does it not give you, in the more immediate term, a good benchmark compared to what interest rates are? Does it fluctuate too much? It's uncertain. My estimates from our model that I've worked on have actually been relatively constant over the last year and a half at around three quarters of a percent for a real interest rate, a short-term real interest rate. So it doesn't seem to be fluctuating a lot now. But there's some uncertainty about it. So yes, when you ask me, do I think of, is monetary policy restrictive? I think of that in

different ways. I do think it's mostly restrictive now, mainly because I'm looking at how the economy is performing, but also in the back of my mind is some notion of real interest rates are above kind of typical estimates, long-run estimates of the new trend. Even if President Trump doesn't do, he has a lot of thoughts on monetary policy. He was again talking about it last night.

even if he doesn't do anything with the chair, removes him or anything like that, does it make the job of Jay Powell's successor a lot harder to make sure that there's, you know, central banking dependence is intact? Well, I do think central banking independence is very important. I think it's important because it

History shows it leads to better outcomes, lower inflation, more stable inflation. We've seen that around the world in central banks in many, many countries that have independent, most countries have independent central banks. For me, I've been in the Fed for over 30 years. I come to work every day just focused on our mission, maximum employment price stability, work with people who are choosing to work at the Federal Reserve, bring all of their knowledge and experience to help us do that along with our other responsibilities. So we're nonpartisan, we're not political.

We just do our job as well as we can. And what's happening outside in the political world is not what I'm thinking about. Do you feel internal pressure? Or again, not so much. Does the central bank have to try harder to make sure that everybody understands?

that you're independent or does it not factor? No, I think it's the same as again throughout my career. We're not partisan, we're not political. I'm not even nominated by a political figure through the

the Federal Reserve Bank president process. So you really feel like this is how we've always operated, again, through many different administrations through my career, and that has served us very well. And that's what I think the American people quite honestly expect from us. We're pretty technocratic, to be honest, very nerdy, very focused on the data, the analysis, and doing our best for the American people

regardless of outside commentary or politics. Do you think U.S. citizens understand what the central bank does? Does there need to be more outreach to make sure that they grasp these subjects? Well, I think one of the things, I'll just be real about it,

actually, is people have lives. They've got family and they've got maybe people they're taking care of. They've got jobs. They've got a lot of responsibilities. I wouldn't expect people to spend a lot of time thinking about the FOMC meeting and the statements and the minutes from the meeting. I would hope that if we do our job really well, we're taking...

the concerns about inflation of the future, concerns about is the Fed going to be there to do their job off the table so that people, whether your families or businesses, can focus on the things that's really important for them to get right in their lives and that our job is to make them not have to worry as much about economic and price instabilities.

And so I feel like in a way a sign of success is that people are not, you know, kind of so focused in their everyday lives about what we're doing. But we just have to, you know, that commitment just has to show through in our actions and hopefully the outcomes that we're able to achieve. President John Williams, thank you so much for joining us. So that's it from Reykjavik here in Iceland where we had a central bank forum. There are presentations.

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