"Third in Command of the Federal Reserve": While progress has been made in controlling inflation, the work is not yet complete

On Friday, July 5th, Eastern Time, John Williams, President of the New York Fed and a permanent voter on the Federal Reserve, stated at an event hosted by the Reserve Bank of India in Mumbai:

"Currently, the inflation rate is around 2.5%, and we have made significant progress in reducing inflation. However, to sustainably reach the 2% target, we still have a way to go. We are determined to accomplish this task."

When asked about the impact of the Federal Reserve's balance sheet on stock valuations, Williams stated that there is no direct connection, but noted that Wall Street's recent performance reflects the actual state of the economy. He said, "The market has been closely watching the U.S. economy, and I believe the same goes for the Indian economy, which has been consistently performing well."

Williams acknowledged that stock valuations are indeed high in some cases, but overall, the market remains optimistic about the future economic prospects of the United States. Williams said:

"The economy is performing very well. The unemployment rate is low, and economic growth is strong. Therefore, I believe that the current positive momentum in the market is largely based on the strong economic fundamentals."

Furthermore, in his speech, Williams discussed the uncertainty in monetary policy against the backdrop of global climate, technological, and supply chain changes, emphasizing the importance of "anchoring" inflation expectations. He also mentioned the complexity of accurately measuring the long-term neutral interest rate (r-star) and refuted the view that the neutral interest rate has risen since the outbreak of the pandemic. He cited data indicating that the neutral interest rates in the U.S. and the Eurozone are close to pre-pandemic levels.

According to median forecasts, in June, Federal Reserve officials raised their expected value for the long-term interest rate from 2.6% in March to 2.8%, following a slight increase in March.

Earlier this week, Williams mentioned that he believes the Federal Reserve is on track to achieve the 2% inflation target.

Moreover, a report last week showed that the core PCE price index favored by the Federal Reserve slowed down in May, rising only 0.1% month-on-month, the lowest increase in six months, reinforcing expectations that the Federal Reserve may begin gradually cutting interest rates later this year.

At the June policy meeting, Federal Reserve officials decided to keep interest rates unchanged at their highest level in over twenty years and hinted that the expectations for rate cuts this year have decreased compared to March. The next policy meeting is scheduled for July 30th and 31st