ALBANY (Reuters) - Federal Reserve Bank of New York President John Williams anticipates slower economic growth and higher inflation this year, largely due to trade tariffs, in comments that indicate he is not in a hurry to lower interest rates.
“I expect uncertainty and tariffs to restrain spending and reduced immigration to slow labor force growth,” Williams said before an event held by NY CREATES Albany NanoTech Complex in Albany, New York.
Williams stated that as a result, he expects growth to slow significantly this year to around 1%, with the unemployment rate rising from its current 4.2% level to 4.5% by the end of the year. The official also predicts that inflation will rise to 3% as President Donald Trump’s tariffs drive up prices before gradually easing back to the 2% target over the next two years.
Williams emphasized that tariffs are already having a noticeable impact on the economy and are pushing up inflation by a modest amount. Furthermore, he told reporters after his speech that the impact of tariffs on the economy is far from over. When it comes to the tariff impact, “I expect them to be stronger in the next few months, not less,” which suggests it’s too early to call for lower interest rates given that the inflation threat has not subsided.
Williams’ comments were made following last week’s Federal Open Market Committee (FOMC) meeting, where officials maintained their overnight target rate range between 4.25% and 4.5% as they navigate the high levels of uncertainty created by Trump’s trade regime of rapidly shifting import tax increases.
The FOMC meeting also saw Fed officials penciling in two rate cuts this year. In recent days, two members of the Fed’s Board of Governors have stated their belief that tariffs are likely to drive a one-time increase in inflation, as they signaled openness to cutting rates at the late July FOMC meeting.
Williams told the gathering that “interest rates eventually need to get back to more normal levels” and that over the next few months, Fed officials will receive data to help them make their next monetary policy decision. He also stated that monetary policy is “well positioned.” In his prepared remarks, he said of the FOMC meeting that “maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals.” He added that the Fed’s current rate stance “allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals.”
Williams also stated that hard data shows “the U.S. economy remains in a good place” while soft data has pointed toward more weakness. Williams welcomed data showing modest expected inflation.
In his comments to reporters, Williams pushed back against moves from some elected officials to strip the Fed of its power to pay interest on reserve balances, which is a key part of its toolkit to set monetary policy to achieve its inflation and job mandates. The power, he said, is an “essential part of the toolkit.”
