John Williams

“A low r-star implies the economy can encounter more frequent and longer periods when monetary policy is constrained by the effective lower bound on nominal interest rates, potentially impeding the achievement of a central bank’s inflation goals and other macroeconomic objectives.”

“These periods also reveal a common bond among central banks: our dedication to our constituents and mission, regardless of geography or structure.”

“Fund managers have also noted that higher relative returns offered by U.S. assets are discouraging diversification away from the U.S. dollar in global currency and asset allocation.”

“Longer-run inflation expectations have remained stable. And with the pullback in tariffs since early April, short- and medium-term inflation expectations have receded back close to their pre-pandemic averages.”

“I interpret the remaining factors (seasonally low bill supply, increased dealer repo intermediation capacity, reduced repo financing demand, and a temporary increase in government-sponsored enterprise [GSE] repo investment activity) as ones that induced a downward shift in the reserve demand curve.”

“Year-over-year productivity growth swings from minus 2 percent to 7 percent, compared to the long-run average of just over 2 percent ( Figure 1 ).”

“This is the critical shift: We are no longer simply using technology to manage risk—we are using technology that is actively shaping how we perceive and interpret risk.”

“Some global fund managers increased the FX hedge ratios of their U.S. asset holdings, particularly amid the notable dollar depreciation in April.”

“Our balance sheet has fallen from the equivalent of around 35 percent of GDP, in early 2022, to around 22 percent of GDP now.”

“This observation to me provides a compelling reason for why a central bank Research Group should support economic historians.”

“Inflation is unquestionably too high at about 4 percent, 1 well above the FOMC’s longer-run goal of 2 percent.”

“Inflation is unquestionably too high at about 4 percent, 1 well above the FOMC’s longer-run goal of 2 percent. This elevation primarily reflects three drivers.”

“This elevation primarily reflects three drivers. The first is the effect of higher tariffs on imported goods.”

“On the price stability side of the Fed’s dual mandate, overall inflation—as measured by the Personal Consumption Expenditures price index—rose to 3-1/2 percent in March.”

“The first is the effect of higher tariffs on imported goods. The second is supply chain disruptions and higher energy and commodity prices owing to the conflict in the Middle East.”

“The second is supply chain disruptions and higher energy and commodity prices owing to the conflict in the Middle East.”

“In the Fed’s monetary policy implementation framework, an ample supply of U.S. dollar reserves delivers adequate liquidity to the banking system, helping to maintain rate control and smooth market functioning.”

“Third, it implies being clear-eyed and disciplined in adapting to and communicating the changing economic landscape and resulting policy trade-offs and decisions.”

“The combination of higher tariffs and energy prices has contributed about a percentage point to that figure.”

“I’ve found that regular engagement allows central banks to fine-tune their individual approaches, so that we can learn from one another’s experiences to better meet the needs of our constituencies.”

“The BIS Triennial Survey showed a 42 percent increase in spot FX activity since 2022. And there was an even larger volume increase for forwards and options,”

“In each of these episodes, productivity growth averaged around 3 percent. At other times, relatively slow productivity growth of around 1-1/2 percent prevailed.”

“3 International facilities including the central bank swap lines and the Foreign and International Monetary Authorities (FIMA) Repo Facility help ensure well-functioning U.S. dollar funding markets domestically and abroad.”

“Today, reserves total around $2.9 trillion, as shown on the right side of the stylized balance sheet ( Panel 2 ).”

“I am confident that these investments will support strong productivity growth in coming years. But, right now, we’re in a race between available supply and surging demand.”

“Sergio, Stephan, and Emil’s work 3 on bank runs, to take what I think will become a representative example, was in a way almost infeasible prior to the ability to smartly read an immense amount of documentation.”

“Central banks today are confronting an increasingly complex environment shaped by repeated supply shocks, geopolitical uncertainty, and rapid advances in artificial intelligence and payments technologies.”

“As a result, we are seeing sharp increases in the prices of semiconductors, power transformers, and other technology that is essential for the AI buildout.”

“To stay on top of these developments, central bankers must remain in a constant state of learning and listening, hearing from voices across disciplines, functions, and institutions.”

“inflation is currently hovering around 3 percent, with tariffs contributing between one half and three quarters of a percentage point to this figure.”

“How do changes in payment technology and digital asset adoption alter the dollar’s international reach?”

“Meanwhile, in the NCCBR market segment, use of repo haircuts is fairly infrequent, with two pilot data collections in the NCCBR segment by the Office of Financial Research showing the majority of transactions involving Treasury securities had zero haircuts.”

“Central banks must own the responsibility to deliver price stability and have the independence of action and the ability to achieve it.”

“First, the tariffs have overwhelmingly been borne domestically—a New York Fed analysis estimates that most of the burden has fallen on U.S. firms and consumers.”

“By way of example, we are currently in the midst of a debt ceiling episode, which—if past experience is a guide—could see the TGA fall further before rapidly increasing by half a trillion dollars or more over the course of a few months.”

“Combining enacted and announced tariffs, estimates of the resulting average effective tariff rate range somewhere between 15 and 20 percent.”

“But actual tariffs in effect in recent months were much smaller than that, as seen by the amount of tariff revenue collected each month.”

“Many of you will have noticed that the FOMC implementation note was changed at the June meeting to make explicit that temporary pauses in RMPs could occur if money market conditions warrant.”

“My expectation is that any new tariffs will primarily replace those that were curtailed or will soon expire, so we shouldn’t see a significant additional impulse on prices from this source going forward.”

“My current estimate is that, to date, the increase in tariffs has contributed around one half to three quarters of a percentage point to the current inflation rate of about 3 percent.”

“At the time of the inaugural conference in 2022, digital assets were primarily used for retail speculation with a limited cross-border scope.”

“Later, when the risk materializes, we conduct a review and find that no single person made a bad decision. Instead, the system as a whole failed to “see” the risk clearly.”

“A mere four years later, participants today discussed a wider range of use cases and showed that institutional adoption is accelerating.”

“Between early July and mid-September—when the TGA reached around $800 billion—the ON RRP fell from a balance of about $200 billion to de minimis levels, and reserves fell by $350 billion.”

“In the Treasury repo market, a lack of consistency and transparency in risk management practices could pose risks to market functioning if one or more counterparties were to default.”

“Additionally, as you know, Chairman Warsh will be appointing a task force on the Fed’s balance sheet.”

“There are no signs of significant second-round effects from tariffs spilling over to the rest of the economy,”

“By reducing the target range for the federal funds rate by a cumulative 75 basis points last year, the FOMC has moved the modestly restrictive stance of monetary policy closer to neutral.”

“Indeed, almost a third of manufacturers and nearly half of service firms reported fully passing along all tariff-related cost increases.”

“Assets are now slowly growing in dollar terms, via RMPs, to maintain ample reserves and accommodate growth in the demand for Federal Reserve liabilities.”

“All in all, I expect tariffs will boost overall prices by a total of between 1 and 1-1/2 percent, with these effects continuing through the first half of next year.”

“All in all, although we are only seeing relatively modest effects of tariffs in the hard aggregate data so far, I expect those effects to increase in coming months.”

“Until COVID-19, central banks in emerging economies, including many in Latin America, typically had followed the lead of the Fed when responding to shocks.”

“Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year.”

“Given the lack of second-round effects and well-anchored inflation expectations, I expect the tariffs largely to have one-off effects on prices.”

“Through the New York Innovation Center in the Markets Group at the New York Fed, and in collaboration with the Bank for International Settlements (BIS), we conduct hands-on research projects around technological innovation.”

“Indeed, there even has been a label attached to it: “conventional monetary policy.” By implication, other monetary policy actions that have been used—such as forward guidance and balance sheet policies—are deemed “unconventional,” and therefore somewhat suspect.”

“the FOMC decided at its meeting last week to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent.”

“I anticipate inflation will peak at around 2-3/4 to 3 percent sometime during the first half of this year, before starting to fall back.”

“However, this narrow understanding of monetary policy is alien to the history of monetary economics and central bank practice.”

“I expect the economy to grow above trend this year, with real GDP growth between 2-1/2 and 2-3/4 percent.”

“Assuming immediate recognition, standard macroeconomic theories predict a paradoxical result: an increase in trend productivity growth drives up real interest rates and causes an economic downturn, with hours worked, investment, and output declining.”

“I expect real GDP growth to be close to 2-1/2 percent this year, reflecting tailwinds from fiscal policy, favorable financial conditions, and investment in AI.”

“As I said, it’s hard to estimate exactly what constitutes an ample level of reserves. We know that number is lower than the current $3.2 trillion, since market indicators still point to reserves remaining abundant.”

“Accordingly, at its meeting last week, the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent.”

“Over the past two months the EFFR has increased by four basis points relative to IORB, and the cumulative distribution of federal funds trades has noticeably shifted to the right, reflecting higher rates being paid by a variety of banks”

“Looking ahead, my base case is for inflation to be about 3 percent this year, before dropping to our 2 percent target in 2027”

“This “perverse” result, in the words of John Campbell (1994), 5 stems from the combination of a strong wealth effect and higher expected real interest rates, which contribute to a transition period during which households enjoy greater consumption and leisure.”

“I expect overall inflation to come in at around 2-3/4 percent this year, before reaching our longer-run 2 percent target in 2027.”

“Looking ahead, if progress on our dual mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time.”

“In terms of an implementation timeline, the TMPG is recommending that firms begin applying the repo risk management recommendations on a rolling basis, prioritizing their most material counterparty exposures and completing the process by June 2026.”

“Culture is not “soft,” or secondary. Culture is an operational asset. It is a form of resiliency, a non-technical redundancy, a backup system for judgment”

“I expect real GDP to grow about 2-1/2 percent this year, supported by stimulus from fiscal policy, favorable financial conditions, and robust investments in artificial intelligence.”

“I expect real GDP growth this year will slow considerably from last year’s pace, to just over 1 percent.”

“Consequently, with growth around its trend pace, I expect the unemployment rate will remain in its recent range of 4-1/4 to 4-1/2 percent.”

“With this deceleration of real GDP, I expect the unemployment rate to rise to around 4-1/2 percent by the end of this year.”

“And with the effects of tariffs on inflation waning later in the year, I expect overall inflation to come in at around 2-1/2 percent in 2026, then fall to 2 percent in 2027.”

“Amid elevated uncertainty in U.S. trade policy last April, we observed unusual price action: the dollar depreciated while Treasury yields rose and equities declined.”

“Given the size of the Treasury repo market—with over $8 trillion in daily average transaction volume—and its interconnectedness with other segments of financial markets, sound risk management is critical.”

“Looking further ahead, if inflation follows the path I expect, further reductions in the federal funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive.”

“After being driven primarily by healthcare over the past few years, employment growth in and around New York City has broadened to include the technology sector.”

“In my view, widespread use of haircuts for Treasury repo could enhance financial system stability and support market functioning during periods of stress.”

“As a result, I expect real GDP growth this year to be about 1 percent.”

“With this slowdown in growth, I expect the unemployment rate to rise to around 4-1/2 percent by the end of this year.”

“I anticipate inflation will come in between 3 and 3-1/2 percent in 2025, and then fall back to about 2-1/2 percent next year before reaching 2 percent in 2027.”

“As you know, so far, the Desk has been conducting reserve management purchases at a monthly pace of $40 billion.”

“Anecdotal reports, supported by jurisdiction-specific measures, indicate that some foreign investors raised the hedge ratios on their U.S.”

“With gradual recognition consistent with empirical evidence, an acceleration in productivity results in faster growth of both consumption and investment.”

“Understanding this distinction is critical because it suggests that the dollar's weakness stemmed largely from the mechanics of how hedging flows transmit through the FX market, rather than from a sudden shift in asset allocation.”

“Data indicate that MMF repo volumes cleared with FICC well exceed $1 trillion, comprising over half of MMF Treasury repo positions ( Panel 8 ).”

“But based on what the data tell us today, I expect the combined effects of trade and immigration policies and associated uncertainty to continue to weigh on growth.”

“And I expect PCE inflation to come in between 3 and 3-1/4 percent this year, before declining to around 2-1/2 percent next year, and reaching 2 percent in 2027.”

“since December 2008, the EFFR has been outside of the target range on only two days.”

“My estimate is that increased tariffs have contributed about one half to three quarters of a percentage point to the current inflation rate.”

“Accordingly, at its meeting in mid-June, the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent in support of the Fed’s dual mandate.”

“Absent a lending facility, the optimal supply of reserves under uncertainty is unequivocally higher than it is without uncertainty.”

“Looking ahead, I expect real GDP growth to be around 2 to 2-1/4 percent this year and over the next two years.”

“The Desk publishes its updated purchase schedule each month, and earlier today announced that it would purchase an additional $40 billion in Treasury bills through mid-March.”

“Centrally clearing SRPs would be one way to reduce such costs. Strictly from a monetary policy implementation perspective, there are likely benefits from offering a centrally cleared version of SRPs.”

“With growth running modestly above my estimate of its potential rate of 2 percent, I expect the unemployment rate to edge down very gradually to 4 percent in 2028.”

“Strictly from a monetary policy implementation perspective, there are likely benefits from offering a centrally cleared version of SRPs.”

“For the reasons I outlined a moment ago, I expect overall inflation to decline to around 3-1/4 percent by year-end, then continue on a glide path toward our 2 percent goal in 2027 and land on target in 2028.”

“Recent evidence suggests this hedging activity may have plateaued, but it reinforces the need for consistent engagement with market participants to better understand shifts in trading activity that can have broader implications for the value of a currency and the FX market in general.”

“In fact, the U.S. Treasury recently estimated that TGA balances could peak around $1.025 trillion by late April, amid tax season inflows, likely resulting in a notable drawdown in reserves.”

“Indeed, if the uncertainty is great enough, the optimal level of reserves can exceed the cutoff for abundant reserves under no uncertainty.”

“My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat.”

“An adjustment to our monthly purchase pace is likely to happen soon. Beyond April, the TGA is likely to decline as the Treasury uses the funds it receives via tax inflows to pay its obligations.”

“The Fed’s securities holdings have shrunk from a peak of about $8-1/2 trillion in 2022 to $6-1/4 trillion today.”

“Indeed, with immediate recognition (not shown), the depressing effect on the inflation rate is trivial, less than one tenth of a percentage point.”

“At its meeting in October, the FOMC decided it would conclude the reduction of its aggregate securities holdings on December 1.”

“But, as the Desk said in its statement in December, the monthly pace can likely be significantly reduced after April.”

“Therefore, one cannot judge whether the policy is optimal simply because the mean spread equals its target.”

“The process has worked according to plan. The Fed’s securities holdings have shrunk from a peak of about $8-1/2 trillion in 2022 to $6-1/4 trillion today.”

“Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral,”

“At its meeting last week, the FOMC decided it would conclude the reduction of its aggregate securities holdings on December 1.”

“This principle has become a bedrock of modern central banking, as economic analysis and history have shown that anchoring inflation expectations is important in maintaining low and stable inflation.”

“This finding that r-star has not meaningfully rebounded is in line with evidence from a variety of models of r-star in the U.S., which show a relatively modest increase of one-quarter to one-half of a percentage point in real-time estimates of r-star between the third quarter of 2018 and the first quarter of 2025.”

“But as reserve levels fall this is shifting somewhat, with the SRF used at the recent June quarter end and at the mid-September tax date.”

“A deep and liquid intraday market might enhance collateral management and reduce some frictions in managing intraday liquidity, which could reduce banks’ demand for reserves for payment purposes.”

“It will then be time to begin the process of gradual purchases of assets that will maintain an ample level of reserves”

“Looking forward, the next step in our balance sheet strategy will be to assess when the level of reserves has reached ample.”

“As a result, in the initial stages following a shift, the economy is likely to behave more like a temporary increase in productivity growth than a permanent one.”

“Such reserve management purchases will represent the natural next stage of the implementation of the FOMC’s ample reserves strategy and in no way represent a change in the underlying stance of monetary policy.”

“In its May 2022 plans, the Committee stated that it would stop runoff when reserves were somewhat above an ample level.”

“In fact, as I mentioned nearly two weeks ago, in the not-too-distant future the Desk will start implementing daily morning SRF operations that will also be settled in the morning.”

“I am closely monitoring a variety of market indicators related to the fed funds market, repo market, and payments to help assess the state of reserve demand conditions.”

“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.”

“Treasury has increased its assumed quarter-end TGA balance from $320 billion in early 2016 to $850 billion on average in 2025.”

“This effect is greatest when the lending rate is closer to the target spread. On the other hand, if the lending rate is very high relative to the target spread, then the facility is rarely used, and the optimal supply of reserves is near what it would be absent a facility.”

“Respondents widely noted that movement toward instant 24/7 payments could increase their demand for reserves, and some also indicated that greater adoption of payment stablecoins could have similar implications.”

“Based on recent sustained repo market pressures and other growing signs of reserves moving from abundant to ample, I expect that it will not be long before we reach ample reserves.”

“These frictions add to the costs that counterparties face when using the facility and mean that counterparties generally require private market repo rates to trade materially above the SRF minimum bid rate before using the facility.”

“Most recently, this has translated to a one-basis-point increase in the EFFR relative to IORB.”

“Banks cite changes to liquidity regulations, as well as shifts in liquidity management amid the transition toward 24/7 payments and the adoption of payment innovations, as important drivers of their preferred levels over the next two years ( Panel 11 ).”

“The Committee has indicated that it will consider stopping balance sheet runoff when we reach that point.”

“Given the wide range of uncertainties, acting as if one knows the star variables when making policy can lead to persistent deviations of inflation from the target that risk unmooring inflation expectations.”

“The exact timing will depend on several factors, but, as President Williams said, given what we know today we probably won’t have to wait long.”

“In other words, there is no single best way to supply reserves; rather, the best mix of tools depends on circumstances and policy preferences unique to each jurisdiction.”

“In particular, future potential changes to bank regulatory liquidity requirements may eventually reduce demand for reserves.”

“In addition, should changes materialize, respondents may think that it will take time to see them implemented, and possibly even more time for banks to react.”

“Given the criticality of those aims, it is desirable and fully expected that the SRF be used whenever it is economically sensible to do so.”

“This implies that banks would have to see large increases in overnight rates to be willing to shed modest amounts of reserves—or, conversely, that a modest decline in reserves could induce a substantial increase in overnight rates.”

“Centrally clearing SRPs would be one way to reduce such cost and thus could further improve counterparty participation and the efficacy of SRPs in curbing rate pressures and maintaining the stability of funding markets.”