A senior Federal Reserve official warns that US unemployment could reach 5% next year

A senior Federal Reserve official has warned that the US unemployment rate could reach 5 percent next year as the central bank continues its battle against persistently high inflation.

John Williams, President of the Federal Reserve Bank of New York, said the central bank needs to do more to eliminate price pressures that have proven surprisingly persistent across a wide range of goods and services in the wake of the coronavirus pandemic.

Williams said he expects the unemployment rate to rise from its current level of 3.7 percent to between 4.5 percent and 5 percent by the end of next year as the Federal Reserve takes more steps to tighten monetary policy through higher interest rates and a smaller balance sheet. binding.

Officials have increasingly conceded that efforts to bring down inflation will involve economic pain after it becomes clear that they will likely need to push their benchmark policy rate higher than expected to bring inflation down to their 2 percent target.

Most economists warn that the unemployment rate could exceed 5 percent.

Calling inflation the “number one economic concern around the world,” Williams said that rooting out price pressures is critical to creating a healthy job market.

“Inflation is too high, and persistently high inflation is undermining our economy’s ability to perform at its full potential,” he said in prepared remarks ahead of a speech at the Economic Club of New York.

So far this year, the central bank has raised the federal funds rate from nearly zero to nearly 4 percent, a level reached at a historically rapid pace due to four consecutive 0.75 percentage point hikes.

Next month, the Fed is expected to slow the pace of increases, dropping to half a point as its policy decisions begin to directly dampen demand and slow economic activity. A rate hike of that magnitude would raise the policy rate to a new target range of 4.25 percent to 4.5 percent.

According to the latest forecasts published in September, most officials thought the Fed might stop its hawkishness around this level. However, Chairman Jay Powell recently said that the so-called “final” rate is likely to be higher than the 4.6 percent level previously expected by most policymakers. Most officials now expect the federal funds rate to exceed 5 percent.

In the discussion that followed his speech, Williams said he expected the Fed to keep interest rates at a higher level at least until the end of next year.

“I see a point, maybe in 2024, that we’re going to start lowering nominal interest rates because inflation is coming down,” he said.

Fed officials continue to express greater concern about doing too little to tame inflation than too much, which Cleveland branch president Loretta Mester recently expressed in an interview with the Financial Times.

In remarks made in June but released Monday, Lyle Brainard, vice president, echoed that point and warned of the costs if future inflation expectations get out of hand.

“With a prolonged series of supply shocks and rising inflation, it is important for monetary policy to take a risk management stance to avoid the risk of inflation expectations deviating from the target,” she said.

Williams said on Monday he expects inflation, as measured by the core personal consumption expenditures index, to slow from its current level of 5.1 percent to between 3 percent and 3.5 percent next year as a result of lower global demand and a downturn in the supply chain. unrest.

However, he warned that containing core inflation, which is associated with sectors such as services and housing-related costs that are difficult to eradicate, will be more difficult and require further monetary tightening. Brainard also warned that long-term changes in the labor supply and a shift away from globalization could lead to more volatile bouts of price pressures.

The head of the New York Federal Reserve said he expects the US economy to grow “only modestly” this year and next, without anticipating a recession.

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