Williams warns low r-star means more frequent lower bound constraints on policy effectiveness.
“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.”
Williams states inflation is at about 4 percent, well above the 2 percent goal.
“Inflation is unquestionably too high at about 4 percent, 1 well above the FOMC’s longer-run goal of 2 percent.”
Williams says inflation is about 4 percent, well above the 2 percent goal, driven by three factors.
“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.”
Williams reports PCE inflation rose to 3.5 percent in March.
“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.”
Williams anticipates moving interest rates toward neutral stance over time if progress continues on dual mandate.
“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.”
Williams reports FOMC maintained fed funds rate at 3.5 to 3.75 percent at mid-June meeting.
“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.”
Williams sees increased downside employment risks and lessened upside inflation risks as labor market cools.
“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.”
Williams states anchoring inflation expectations is a bedrock principle for maintaining low and stable inflation.
“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.”