Dive Brief:

• New York Federal Reserve Bank President John Williams predicted Thursday that the central bank will hit its 2% inflation target in early 2026 while adding that the Fed will probably cut borrowing costs before reaching that goal.
• “We want to be able to move before inflation is all the way to 2%,” Williams said in response to a question after a speech at the Economic Club of New York. Asked when price pressures will likely fall to the Fed’s objective, he said, “my forecast would be in 20 — probably early 2026.”
• During the second half of this year the increase in the personal consumption expenditures price index will likely slow from an annual pace of 3.3% during the first quarter and finish the year at 2.5% before “moving pretty close to 2% by the end of next year,” Williams said. He declined to predict when the Fed will trim the federal funds rate from its current 23-year high.

Dive Insight:

Williams reiterated that, after an unexpected gain in the PCE and other gauges of inflation during Q1, policymakers need to see more evidence that price pressures are steadily falling before trimming the benchmark rate from its current range between 5.25% and 5.5%.

“Inflation in the United States remains too high and in recent months there has been a lack of further progress toward our 2% goal,” he said.

Williams, who also serves as vice chair of the policy-setting Federal Open Market Committee, voiced optimism that inflation will decline.

“With the economy coming into better balance over time and the disinflation taking place in other economies reducing global inflationary pressures, I expect inflation to resume moderating in the second half of this year,” he said in his speech.

Slowing economic growth may help cool inflation in coming months.

Consumers, who fuel nearly 70% of economic growth, trimmed spending on goods during Q1 compared with Q4, the Bureau of Economic Analysis said Thursday.

In turn, gross domestic product growth slowed to a 1.3% annual rate, or lower than the 1.6% previous estimate, the BEA said. GDP expanded 3.4% during Q4.

“Economic growth will remain below trend this year,” Moody’s Analytics Senior Director Scott Hoyt forecast in a statement, noting limited fiscal support, headwinds for lower-income consumers and risks from higher prices and transportation challenges posed by conflicts in Ukraine and the Middle East.

“With rates as high as they are and the Treasury yield curve inverted and pressuring the financial system, concluding the economy has soft-landed may still be premature,” Hoyt said.

Williams expressed a sunnier view on prospects for the economy, predicting that growth in GDP this year will range between 2% and 2.5%. Unemployment will likely rise to 4% at the end of 2024 from 3.9% in April before falling to a longer run level of 3.75%, he predicted.

“Sum it up and you have an economy that has come off the boil — and needed to — but remains on track for continued growth,” Jim Baird, Plante Moran Financial Advisors CIO, said in an email.

“The question is one of timing for policymakers who need to see evidence that inflation gauges have resumed their descent toward 2% and the risk of a second wind catching the inflation sail has dissipated,” Baird said.

The FOMC is next scheduled to meet June 11-12.