NY Fed’s Williams defends tight policy as entirely appropriate

On Wednesday, Federal Reserve Bank of New York President John Williams vigorously defended the Fed’s tight monetary policy approach. 

During remarks at an event sponsored by the New York Association for Business Economics, Williams said that tariffs, both currently imposed and recently announced, are expected to lift inflation in the coming months, and justified the Fed’s go-slow approach.

“Although we are only seeing relatively modest effects of tariffs in the hard aggregate data so far, I expect those effects to increase in the coming months,” he said in his prepared remarks. “Maintaining this modestly restrictive stance of monetary policy is entirely appropriate.”

His comments come as trade tensions have flared up anew. Donald Trump’s administration has ramped up various import tariffs in recent months as part of the broader economic strategy, many of them on consumer goods. Economists and business executives have cautioned that such steps could exacerbate inflation and disrupt supply chains.

According to current projections, tariffs could raise inflation by nearly a full percentage point between now and 2026, Mr. Williams said. He also said the weakening US dollar would tend to lift import prices, contributing to inflationary pressure.

Williams said the current data reflects the initial impact of tariff increases on core goods prices. He pointed out that price hikes are already evident in categories such as household appliances, musical instruments, luggage, and tableware, which are particularly vulnerable to trade-related costs.

Investors brace for possible September rate cut

Despite worries about inflation, the Fed has not raised its benchmark interest rate through the first half of 2025. The new rate is the highest in more than two decades, after several increases earlier in the year in efforts to tame post-pandemic inflation.

With inflation flashing signs of cooling in places, notably in service industries, investors are increasingly betting that the Fed may start cutting rates as soon as September. The futures markets have priced in a strong chance that the Fed will cut rates at least once before the end of the year.

But Williams had made it clear that those expectations may be premature. He emphasized that even if the headline inflation rates have moderated, underlying pressures, particularly from global trade, were a concern.

Consumer price index (CPI) figures published earlier this week revealed general inflation in June was up on what was expected for the fifth consecutive month. However, products subject to Trump’s new tariffs have already begun to show more expensive price tags.

While service inflation may be slowing, there are signs that price pressures from goods may be building. And this shows the necessity of leaning on the economic numbers before jumping to conclusions regarding the general direction of inflation.

Williams warns of economic slowdown and job market shift

The New York Fed leader also sketched a less hopeful outlook for the wider economy. He predicted US economic growth will slow to about 1% in the coming year, compared with a 2.1% pace in 2024. The slower growth could come from higher interest rates, global uncertainty, and falling consumer spending.

Williams also pointed out that unemployment will likely climb to around 4.5%. Even though still historically low, the increase would be a sign of a cooling labor market as companies react to tighter financial conditions and softer demand.

But Williams had no time for such thinking that the Fed should make a quick U-turn to rate cuts. He stressed the need to keep inflation expectations anchored and to maintain the Fed’s credibility.

Williams’ interview came a day after Fed Chair Jerome Powell spoke, with the central bank leader warning of higher price pressures due to tariffs. Powell said now was a time for the central bank to watch the economy for fresh data before changing rates.

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