John Williams, the head of the Federal Reserve in New York, has indicated that the U.S. may have to keep its interest rates elevated for a while longer. This is necessary to ensure that inflation, which is the rate at which prices for goods and services increase, is on track to settle back down to the Fed's target of 2%. That said, Williams acknowledged that inflation is not rising as quickly as it once was. For instance, the consumer price index, which tracks changes in how much people pay for goods, has reduced to a yearly increase of 3.1%—down from the highest increase in 40 years of 9.1% that was recorded in mid-2022.
He predicts that by the end of this year, inflation will decrease further to 2.25% and hopes it will meet the preferred rate of 2% by 2025. Before the COVID-19 pandemic, the inflation rate in the U.S. was just under 2% annually. He also mentioned that there might need to be a slight slowdown in the job market, which could lead to an increase in the unemployment rate from the current 3.7% to 4%.
Williams emphasized the need for the Federal Reserve to stay attentive to inflation trends, highlighting that there is still significant work to be done to achieve the long-term goal of stable prices. He compared inflation to an onion with three layers.
The first layer, which includes prices of raw materials like oil and food, has mostly gone back to normal levels.
The second layer, concerning the prices of manufactured goods such as clothing, home appliances, and electronics, has seen prices rise almost negligibly.
The third layer involves the prices of services, which have been the toughest to bring down. However, Williams noted improvements in this area as well.
In this third layer, the costs of rent and salaries are the most significant contributors to persistent inflation. But there are signs of improvement: rental costs are beginning to drop in many parts of the country, and the rate at which wages are increasing has slowed down.
Williams concluded that the current data show they are heading in the right direction, but they still have a distance to go before achieving the goal of stable prices.