New York Fed President: Price shocks during the pandemic have reshaped the American public's inflation outlook

According to the Zhitong Finance APP, John Williams, the third-ranking official of the Federal Reserve and the President of the New York Federal Reserve who has permanent voting rights on FOMC monetary policy during his term, stated on Wednesday that the price shocks during the COVID-19 pandemic have fundamentally changed American consumers' perceptions and understanding of inflation. Policymakers can no longer take for granted that the public's expectations for future price increases are firmly anchored.

Williams warned that after the pandemic, any negative macro event could easily trigger consumer panic about inflation. Policymakers should not only focus on the long-term expectations of rising consumer prices but also pay attention to "the entire inflation curve" to avoid inflation becoming increasingly high and persistent.

"The past five years have indeed changed people's views on inflation," Williams said during a meeting hosted by the Bank of Japan in Tokyo on Wednesday. He added that policy goals should not only anchor long-term inflation expectations but "also anchor the entire inflation curve."

"The situation you most want to avoid is letting inflation become highly persistent, as high persistence could ultimately evolve into a permanent inflation phenomenon," he stated during the meeting.

On Tuesday, the two-day annual central bank conference hosted by the Bank of Japan and its affiliated think tank opened at the Bank of Japan headquarters in Tokyo. Although there are no walking trails or beautiful rural scenery, this central bank event is still regarded by the industry as Japan's version of the "Jackson Hole Global Central Bank Annual Meeting." Attendees include renowned scholars from the United States, Europe, and Asia, as well as important officials from the Federal Reserve, European Central Bank, Bank of Canada, and Reserve Bank of Australia, including the Federal Reserve's third-ranking official, John Williams.

Multiple surveys targeting American households and consumers show that after the Trump administration repeatedly announced tariff policies, American consumers' views on the U.S. economy have worsened, expectations for short-term price increases have risen, and the consumer confidence index has dropped to near historical lows.

However, inflation expectation indicators based on market surveys and the New York Federal Reserve's inflation survey still indicate that long-term consumer inflation expectations generally hover around the Federal Reserve's 2% target. Notably, as Williams mentioned, the price shocks during the COVID-19 pandemic have fundamentally changed American consumers' perceptions and understanding of inflation. This is why, in the face of tariff shocks, the American public's inflation expectations for the next year have significantly increased. They are generally concerned that the inflation caused by the pandemic has not been completely eliminated, and the inflationary impact brought about by Trump's tariff policies may once again drive inflation to soar as it did during the pandemic.

Regarding inflation expectations, the latest consumer survey conducted by the University of Michigan from April 22 to May 13 shows that consumers expect U.S. prices to rise at an annual rate of 7.3% over the next year, the highest level since 1981. The consumer confidence index unexpectedly fell to 50.8, not only below April's 52.2 but also marking the second-lowest level in history, only higher than the record low set in June 2022.

Last week, Williams hinted that Federal Reserve policymakers might keep the benchmark interest rate unchanged until July to observe the substantial impact of trade policy adjustments and tax cuts led by President Donald Trump on the U.S. economy Several Federal Reserve policymakers, including Chairman Jerome Powell, have recently stated that they face the dual risks of rising unemployment and increasing inflation in the United States. However, they generally believe that monetary policy is still in an "appropriate position" and that they can wait to observe the trends in the U.S. economy before deciding on the next steps.

Neel Kashkari, President of the Minneapolis Federal Reserve, emphasized at a recent meeting that, given the economic growth uncertainties triggered by a new round of global trade wars and the "paramount" necessity of defending inflation expectations, the Federal Reserve must proceed with caution. In his prepared remarks, Kashkari noted, "Trade negotiations may take months or even years to fully resolve." He also mentioned that tariffs on intermediate goods take time to transmit to end consumers, and as time goes on, the risk of losing control over inflation expectations may increase.

On the other hand, as Federal Reserve officials continue to signal the maintenance of current interest rates, and after the two largest economies, the U.S. and China, reached a trade consensus and agreed to significantly reduce each other's tariffs, expectations for a "soft landing" for the U.S. economy have rapidly increased. Financial institutions on Wall Street, such as Goldman Sachs, have shown a notable cooling in their bets on Federal Reserve rate cuts.

The team of economists at Goldman Sachs now expects the Federal Reserve to begin three rate cuts in December rather than the previously anticipated start in July; meanwhile, economists at Barclays predict that the Federal Reserve will implement only one rate cut in 2025, followed by three cuts of 25 basis points each next year. Previously, Barclays economists had expected two rate cuts of 25 basis points each this year, to occur in July and September