New York Fed President John Williams anticipated that he expects inflation to fall this year by 2.5%, but warned that the covid-19 pandemic confronts any prognosis with great uncertainty.
In view of the rapid recovery and high inflation, Williams admitted that the Fed is “moving closer to a decision” on raising interest rates.
With inflation reaching its highest level in nearly 40 years, the Fed has already begun to remove the massive stimulus injected into the world’s largest economy to aid its recovery from the pandemic.
Many experts now expect the Fed’s Federal Open Market Committee (FOMC), which sets monetary policy, to raise the key interest rate from zero in March, with three or even four possible hikes this year.
However, Williams clarified that the date will depend on how the recovery progresses.
“With growth slowing and supply constraints gradually being resolved, I expect inflation to fall to around 2.5 percent this year, much closer to the FOMC’s long-term target of 2 percent,” he said in a speech to the Council on Foreign Relations.
“And looking further ahead, I expect inflation to approach 2 percent in 2023,” he added.
The main factors behind the price increases are high demand and holes in the supply chain due in part to blockades in Asia that have obstructed manufacturing of key products.
While the situation is expected to resolve gradually, the Fed official warned that the pandemic is unprecedented and that the wave of the omicron variant continues to bring challenges for businesses and households.
“As we turn a page in the new year, it is clear that we have not yet reached the end of this pandemic story,” he said.