Latest Economic Data Shows Cooling Inflation and Labor Market, Says New York Fed President

New York Fed President John Williams gave a speech to bond-market experts on Wednesday, stating that the most recent data reflects a cooling in both inflation and the labor market, two factors that could help bring down inflation.

Gradual Cooling in Labor Market Demand

Williams discussed how there are some indications of a “gradual cooling in the demand for labor” which is likely to help bring down inflation levels. The unemployment rate is expected to rise from 3.5% to a range of 4%-4.5% over the next year.

Inflation to Meet Fed’s 2% Goal Over Two Years

Williams stated that he expects inflation, as measured by the personal consumption expenditure price index, to decline to around 3.25% this year from its February level of 5%, and then move down to the Fed’s 2% goal over the next two years.

Key Inflation Measures

Service inflation minus food, energy, and housing is one of the key inflation measures that the Fed is watching at this time. “It is not budging,” Williams said.

Another Interest Rate Hike Possible

Williams underscored that Fed officials said after their last meeting that another hike “may” be needed. The financial market has priced in high odds of a 25-basis-point hike at the May 2-3 meeting. The Fed has pushed its benchmark rate to a range of 4.75%-5% over nine straight moves at policy meetings since March 2022.

Williams on Credit Conditions

Williams said that “conditions in the banking sector have stabilized” since the collapse of Silicon Valley Bank. While there will likely be some tightening in credit conditions, “it is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy,” he said.

Disagreement with Fed Staff Forecast

Williams said his disagreement with the staff’s forecast reflects the large amount of uncertainty about the outlook. He cited data from the first quarter, which shows the economy continues to expand at a “solid pace.” In contrast, the Fed staff has forecast a recession starting later this year.

Market Update

The Dow Jones Industrial Average and S&P 500 finished lower on Wednesday while the yield on the 10-year Treasury note rose to 3.59%. Emily Bary of MarketWatch contributed to this report.