On Friday, New York Fed President John Williams said that inflation is still the regulator’s top concern, however he is also watching credit conditions carefully following a bank crisis which saw three US lenders collapse this month.

In a speech at the Housatonic Community College in Bridgeport, Connecticut, Williams said, “Stresses in parts of the banking system are likely to result in a tightening of credit conditions that will in turn reduce spending by businesses and households.” 

He noted however, “The magnitude and duration of these effects, however, is still uncertain.”

Williams also emphasized that policy positions by the central bank would be driven by the economic data.

Despite the bank failures, which had sent shockwaves through the financial sector and markets, the Federal Reserve raised interest rates by 25 basis points last week, after hotter reads in inflation and a hotter than expected jobs market drove concern the economy was not cooling enough.

Williams said, “I will be particularly focused on assessing the evolution of credit conditions and their effects on the outlook for growth, employment, and inflation.”

Williams said it was his personal expectation that inflation would decline to roughly 3.25% this year, before dropping further toward the Fed’s 2% target rate in the next two years.

Inflation is still more than a full percentage point above where Williams expects to see it by year’s end.

The core personal consumption expenditures price index, excluding the volatile food and energy prices, the preferred measure of inflation for the Federal Reserve, rose 4.6% in February over the previous year, a fall from the 4.7% year-over-year rise seen the previous month. Month-over-month, prices were up 0.3%, compared to the 0.5% revised gain seen in January.

Williams said he expects to see modest economic growth this year, and for growth to accelerate somewhat next year, although he also expects to see the unemployment rate rise to 4.5% over the next year, compared to February’s 3.6%.