The turmoil in the banking system will likely lead to tighter credit conditions, and consequently hinder businesses’ and households’ spending, New York Federal Reserve Bank President John Williams said Friday.
He said that he will focus on assessing how credit conditions evolve and what effects they will have on the economic outlook. Bear in mind that tighter credit conditions are deflationary.
“The economic outlook is uncertain, and our policy decisions will be driven by the data and the achievement of our maximum employment and price stability mandates,” Williams said in a prepared speech in Bridgeport, Connecticut.
For 2023, Williams, who serves as vice-chairman of the rate-setting Federal Open Market Committee, is expecting inflation to pull back to around 3.25%, before moving closer to the 2% target in the next two years. By comparison, the Fed’s preferred inflation gauge came in at 5.0% Y/Y in February, so there’s still a ways to go.
He also sees real gross domestic product growing modestly this year and for “growth to pick up somewhat next year. Slower growth and tighter monetary policy will likely lead to some softening in the labor market. So, I anticipate unemployment gradually rising to about 4-1/2 percent over the next year.”
On Thursday, Richmond Fed President Tom Barkin said overall bank deposit flows seem “relatively stable,” but warned that the implications of the tumult in the banking system are unclear.