A senior Federal Reserve official has warned that the US unemployment rate could hit 5% next year as the central bank continues its fight against still high inflation.
John Williams, president of the Federal Reserve Bank of New York, said the central bank must do more to eradicate price pressures that have proven surprisingly persistent across a wide range of goods and services in the aftermath of the coronavirus pandemic. coronavirus.
Williams said he expects the jobless rate to drop from its current level of 3.7% to between 4.5% and 5% by the end of next year as the Fed takes further steps to tighten monetary policy via higher interest rates and a smaller balance. sheet.
Officials have increasingly recognized that the effort to bring inflation down will lead to economic hardship after it became clear that they will likely have to push their benchmark policy rate higher than expected to bring inflation down to their 2% target.
Most economists warn that the unemployment rate could exceed 5%.
Describing inflation as the “number one economic concern across the globe”, Williams said removing price pressures is crucial to creating a healthy labor market.
“Inflation is far too high, and persistently high inflation undermines the ability of our economy to perform to 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 near zero to nearly 4%, a level reached at a historically rapid pace due to four consecutive rate hikes of 0.75 percentage points. .
The Fed is expected to slow the pace of increases next month, moving to a half-point increase as its policy decisions begin to more directly dampen demand and dampen economic activity. A rate hike of this magnitude would bring the key rate to a new target range of 4.25% to 4.5%.
According to the latest projections released in September, most officials believed that the Fed could end its tightening campaign around this level. However, Chairman Jay Powell recently said the so-called “terminal” rate would likely rise above the 4.6% level that most policymakers had previously expected. Most officials now expect the fed funds rate to eventually top 5%.
In a discussion following his speech, Williams said he expects the Fed to keep rates higher until at least the end of next year.
“I see a point, probably in 2024, where we start to drive nominal interest rates down because inflation is coming down,” he said.
Williams said on Monday he expected inflation, as measured by the core personal consumption expenditure index, to slow from its current level of 5.1% to between 3% and 3.5. % next year due to cooling global demand and shrinking supply chain. disturbances.
However, he warned that containing underlying inflation, which is linked to sectors such as services and housing-related costs that are harder to eliminate, would be more difficult and would require further monetary tightening.
The New York Fed chairman said he expected the U.S. economy to grow “only modestly” this year and next, coming to a halt before forecasting a recession.