Federal Reserve Bank of NY CEO discusses monetary policy impacts on real activity

Investing.com -- John C. Williams, President and CEO of the Federal Reserve Bank of New York, recently shared his insights on the impacts of monetary policy on real activity. His remarks were made at the 2025 US Monetary Policy Forum in New York City, where he discussed a paper on the same subject.

The paper presented an analysis of the timing and magnitude of monetary policy shocks on spending and employment levels, both overall and within specific sectors. The study found that the most significant impacts of monetary policy shocks were on housing, business investment, and consumer goods spending, in that order. The maximum effect on GDP was observed after a year and a half, while the impact on employment took two years to manifest.

Williams noted that the paper’s results were generally in line with previous studies. However, he also highlighted the role of inflation expectations in understanding why disinflation hasn’t led to a slowdown in real activity. He expanded on this topic, discussing the behavior of inflation expectations and how monetary policy shocks influenced these expectations.

Williams examined two key questions: whether inflation expectations behaved differently in the past five years compared to the pre-pandemic period, and the effects of monetary policy shocks on inflation expectations compared to their effects on real activity.

He provided a brief overview of inflation and inflation expectations over the past decade. Before the pandemic, inflation was low and stable, fluctuating between 0% and 3%. However, inflation surged during 2021 and the first half of 2022, before reversing most of that increase.

Short-term inflation expectations mirrored the rise and fall of inflation, while medium-term expectations remained relatively stable. Williams noted that these expectations have now returned to levels that were prevalent between mid-2013 and mid-2016, before inflation expectations started to decrease during the prolonged low inflation period before the pandemic.

In his analysis, Williams found that the sensitivity of inflation expectations to inflation surprises, or the difference between expected and actual inflation, remained consistent during the past five years compared to the pre-pandemic period. He also observed that the co-movement of revisions in expectations across different horizons was somewhat lower in the past five years than in the pre-pandemic period.

Williams concluded his remarks by analyzing the response of inflation expectations to monetary policy shocks. He found that there was a delay of about eight months before the shock affected inflation expectations. The magnitude of responses declined with the length of the forecast horizon, and long-run inflation expectations remained stable.

Williams emphasized that these findings suggest that respondents expect an inflation shock to gradually decay over the ensuing years. He also noted that the paper’s clear and concise approach was instrumental in stimulating further investigations into the effects of monetary policy on inflation expectations.

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