(Bloomberg) -- Federal Reserve Bank of New York President John Williams said that he started to factor in proposed policies of President-elect Donald Trump in his economic projections, and that policy is well-positioned to respond to uncertainties next year.
“In my own personal forecast, I have incorporated some thinking about where fiscal policy may be, immigration and other policies, because those are important drivers to thinking about the economic outlook,” Williams said in an appearance Friday on CNBC. “But I would just emphasize that there is a lot of uncertainty about what those effects will be.”
Some economists estimate plans put forward by Trump — such as a broader use of tariffs and an immigration crackdown — may stoke inflation or add constraints to the labor market, complicating the outlook for the central bank. Fed Chair Jerome Powell said Wednesday that some officials had started to preliminarily account for potential fiscal policy changes in their forecasts.
The Fed lowered its benchmark policy rate by a quarter percentage point earlier this week, to a range of 4.25% to 4.5%. That was the third consecutive rate cut, but Powell signaled the pace of reductions is now likely to slow.
Policymakers estimate they will lower rates twice in 2025, according to the median projection released on Wednesday, compared with the four cuts they forecast in September. That reflects officials dialing up their estimates for where inflation will lie at the end of 2025.
Williams spoke minutes after fresh data showed the Fed’s preferred inflation gauges rose by less than economists had expected. Prices, excluding food and energy, increased 0.1% in November, the smallest monthly advance since May.
He said the latest inflation data are “encouraging.” While the progress toward the central bank’s 2% goal has been bumpy, he said policy is well positioned. He described the central bank’s stance as “somewhat restrictive.”
Neutral Rate
Williams said he thinks the baseline trajectory will see the Fed continue moving its policy rate down toward the neutral level, which neither promotes nor restricts economic activity.
“But we need to be data dependent and we have time to really assess the data, assess what’s happening and come to the best judgments based on the data, based on the outlook and the risks to achieving our goals,” he said.
There is some uncertainty among Fed officials, and economists more broadly, about where the neutral rate lies. Many are starting to believe that figure may be higher than previously thought, ultimately meaning the Fed may keep rates at higher levels than forecast in the past.
Williams said a boost in productivity growth in the US after the Covid-19 pandemic may be driving up the neutral rate “a bit.” He said a New York Fed model estimates the rate sits slightly higher than before the pandemic.
Still, he said factors that pulled down estimates of the neutral rate before the pandemic, such as demographic trends, are still in place.
Meanwhile, Williams described the economy as solid overall. He expects economic growth to slow somewhat in 2025 to about 2%, and for the unemployment rate to be around 4.25% — roughly where is it now.
“I think the disinflationary process hopefully will continue,” Williams said. “There is a lot of uncertainty now for a number of reasons, including uncertainty around some of the policies that may happen next year. But right now, I think we’re in a really good place.”
--With assistance from Catarina Saraiva.
(Updates to include additional context and comments starting in the third paragraph.)
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