Fed's Williams defends response to postpandemic inflation surge

By Greg Robb

The central bank was dealing with extreme downside risks, the New York Fed president argues

New York Fed President John Williams defended the central bank's delayed response to the outbreak of inflation in 2021 - saying that policymakers were grappling with extreme downside threats to the economy and financial markets in an atmosphere of tremendous uncertainty.

Many academics and economists have criticized the Fed's slow reaction to the outbreak of inflation, which started to accelerate in 2021 and hit 9% in June 2022.

The Fed didn't fully stop buying bonds in the market, a program called quantitative easing, until March 2022; that program is designed to boost economic growth. The Fed started to raise rates that same month.

At a weekend conference for central bankers that was not open to the public, Williams was asked if there was anything the Fed might have done differently in the aftermath of the pandemic. A recording of Williams' remarks was released on Monday.

The New York Fed president said it was important to remember that "everything was completely uncertain."

"Job No. 1 was to make sure the financial system continued to work, starting for us in the U.S. Treasury market, and the adjacent markets, in making sure there was adequate liquidity," Williams said.

The Fed also wanted to make sure there was that confidence that the economy would not only get through the pandemic, but "hopefully without this kind of scarring that we had seen in the global financial crisis," he said.

"The real issue here was not, 'Did you get your forecast right?' or 'Could you have raised interest rates a little earlier?' but managing the extreme risks," Williams said.

The central bank accomplished this task "very effectively," he said.

Once the rise in inflation became clear from the "noisy" data, the Fed reacted "decisively and rapidly," Williams said.

Fed watchers hope the central bank will use an upcoming five-year policy review to discuss in detail the policy lessons learned from the pandemic. That review is scheduled to take place in 2025.

Asked about the upcoming review at his last press conference, Williams only said that it would likely start around the end of this year.

"We will be devoting a lot of careful thought and planning the contours of it," he said, but added he wasn't ready to discuss specifics.

The Bank of England commissioned former Fed Chairman Ben Bernanke to review its response to the postpandemic surge of inflation.

Bernanke was critical of the BOE's economic modeling and suggested the central bank communicate with the public using a range of "scenarios" for how the central bank might react to certain economic conditions.

Many Fed officials have borrowed this advice and have been talking about scenarios in their speeches.

In his discussion of current economic conditions, Williams only said he was confident that the central bank would get inflation down to the Fed's 2% inflation target.

-Greg Robb

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07-01-24 1516ET

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