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The Fed: Fed’s Williams sees inflation subsiding this year aided by a slowdown in growth

Inflation will drop to around 2.5% this year, much closer to the Federal Reserve’s longer-run target of 2%, said New York Fed President John Williams, on Friday.

“Just as the pandemic has followed its own script, I anticipate the dynamics of inflation will also be different than previous cycles,” Williams said, in remarks to the Council on Foreign Relations.

“With growth slowing and supply constraints gradually being resolved, I expect inflation to drop to around 2.5% this year,” he said. The Fed’s favorite inflation gauge, the personal consumption expenditure price index, was up 5.7% in the year to November, the fastest rate since 1982. Williams said the inflation rate will sink even closer to 2% in 2023.

Williams is a key ally of Fed Chairman Jerome Powell. While other Fed officials have backed a first interestrate hike starting in March, Williams was more circumspect, saying only that he expects a gradual rise in the Fed’s benchmark rate from its current very-low level back to more normal levels.

Fed officials have penciled in three rate hikes this year. In December the central bank set a plan to end its purchases of Treasurys and mortgages in mid-March.

In his remarks, Williams said he expects economic growth to slow in 2022 to a 3.5% annual rate from an estimated 5.5% rate last year.

“I expect the current omicron wave to slow growth in the next few months as people once again pull back from contact-intensive activities,” Williams said.

The new omicron COVID variant will temporary prolong and intensify labor supply challenges and supply-chain bottlenecks.

“But, once the omicron wave subsides, the economy should return to a solid trajectory and these supply constraints on the economy should ebb over time,” he added.

At the same time, Williams said he expects the unemployment rate will come down further to 3.5% this year from 3.9% in December.

Stocks DJIA, -0.90% SPX, -0.58% were lower Friday on concerns about the impact of higher interest rates on the economy.

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