New York Federal Reserve Chairman John Williams said on Tuesday that he expects the US economy to avoid a recession even as he sees the need for much higher interest rates to control inflation.
“Recession is not my primary condition at the moment,” Williams told CNBC’s Steve Liesman during a live interview on “Squawk Box.” “I think the economy is strong. Obviously, financial conditions are getting tight and I expect growth this year to slow somewhat compared to what we saw last year.”
Measuring that, he said he could see GDP gains fall to around 1% to 1.5% for the year, a far cry from the 5.7% in 2021 which was the fastest pace since 1984.
“But this is not a recession,” Williams noted. “It’s a slowdown we have to see in the economy to reduce the inflationary pressures we have and bring down inflation.”
The most popular inflation indicator shows prices rose 8.6% from a year ago in May, the highest level since 1981. It is a measure favored by the Fed, but still well above the central bank’s 2% target.
‘Far from where we want to be’
In response, the Fed has enacted three rate increases this year totaling about 1.5 percentage points. The latest forecasts from the FOMC rate-setting indicate that more is on the way.
Williams said the federal funds rate, which banks charge each other for overnight borrowing but sets the standard for many consumer debt instruments, is likely to rise to 3%-3.5% from the current target range of 1.5%-1.75%. .
“We are far from where we need to be” about pricing, he said.
“My primary expectation is that we need to get into a somewhat restricted area next year given the high inflation and the need to bring down inflation and really achieve our targets,” Williams said. “But that projection is about a year from now. Of course, we need to be data-driven.”
Some data points recently indicated a sharp slowdown in the growth picture.
While inflation is at its highest level since the Reagan administration, consumer sentiment is at record lows and inflation expectations are rising. Recent manufacturing surveys from regional Federal Reserve offices indicate that activity is contracting in multiple areas. The employment picture was the main bright spot for the economy, although weekly jobless claims rose slightly.
The Atlanta Fed gauge that tracks real-time GDP data indicates a growth rate of just 0.3% for the second quarter after a 1.5% decline in the first quarter.
“We will have lower growth, but we will continue to grow this year,” Williams acknowledged.
In addition to raising interest rates, the Fed has begun to dispose of some assets on its balance sheet — notably Treasuries and mortgage-backed securities. The New York Federal Reserve is in the early stages of a program that will eventually see the central bank allow up to $95 billion in bond yields maturing each month.
“I don’t see any signs of a slow tantrum,” Williams said. “The markets are doing well.”
The St. Louis Fed Index of Market Pressures hovered around record lows in data going back to 1993.