By Michael S. Derby
ALBANY (Reuters) -Federal Reserve Bank of New York President John Williams expects slower growth and higher inflation this year due in large part to trade tariffs, in comments that suggested he is in no rush to cut 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 said that as a result he expects growth to slow considerably this year to around 1%, with the unemployment rate rising from its current 4.2% level to 4.5% by year’s end. The official also expects that inflation will rise to 3% as President Donald Trump’s tariffs drive up prices before taking two years to gradually ease back to the 2% target.
Williams said tariffs are clearly having an impact on the economy so far and are already pushing up inflation by a modest amount. What’s more, the impact is far from done, Williams told reporters after his speech. When it comes to the tariff impact on the economy, “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 abated.
Williams’ comments were his first since last week’s interest rate setting Federal Open Market Committee meeting. That gathering saw officials maintain their overnight target rate range at 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 rises.
The FOMC meeting also saw Fed officials pencil in two rate cuts this year. Over recent days, two members of the Fed’s Board of Governors have said they believe the 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 “over the next few months” Fed officials will get data to help them make their next monetary policy choice.
The official also told reporters 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 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 said the hard data shows “the U.S. economy remains in a good place” while soft data has pointed toward more weakness. Williams said he 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.”
(Reporting by Michael S. Derby; Editing by Chizu Nomiyama)
