New York Federal Reserve President John Williams told attendees at a Washington conference on Tuesday that the central bank's policy stance is well placed to support a stabilizing labor market and a return to its 2% inflation target. Williams delivered the prepared text at an event hosted by America’s Credit Unions.
Williams said that monetary policy is currently helping to steady the jobs backdrop while keeping sufficient restraint on the economy to bring inflation down. In his prepared remarks he stated,
"Monetary policy is currently well positioned to support the stabilization of the labor market and return inflation to our 2% goal."
Looking ahead, Williams said that further easing of policy would be appropriate if inflation evolves as he anticipates. He emphasized that additional reductions in the federal funds rate would be warranted under that scenario to avoid a situation where monetary policy becomes unintentionally more restrictive. He put this succinctly in his speech:
"if inflation follows the path I expect, further reductions in the federal funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive."
Williams made his remarks against the backdrop of heightened volatility in global markets tied to U.S. and Israeli military actions in Iran. That conflict has pushed energy prices higher, a dynamic that has the potential to add upward pressure to inflation readings that already remain above the Fed's 2% benchmark. Markets, reacting to the risk that the conflict could lift prices, have been paring back expectations for additional policy easing this year.
Williams did not address the economic impact of the Iran conflict in his prepared text.
Last year the Federal Reserve reduced its benchmark federal funds rate by three-quarters of a percentage point, bringing the policy range to 3.50%-3.75% as officials sought to provide support to a weakening job market while maintaining enough restraint to guide inflation back toward target. Policymakers had been anticipating additional rate cuts this year on the assumption that inflationary pressures would fade; Williams said the war now clouds that outlook.
On the outlook for growth, Williams described the U.S. economy as being on solid footing and projected 2.5% growth for the year. He attributed that strength to a combination of fiscal policy stimulus, favorable financial conditions, and substantial investments in artificial intelligence.
Williams also characterized the labor market as having stabilized in what he described as a low-hire, low-fire environment. He said he expects the unemployment rate to edge lower this year and again in 2027.
Turning to drivers of inflation, Williams identified U.S. import tariffs as a notable source of upward pressure this year, but he said that influence should diminish heading into the middle of the year. He forecast that the Personal Consumption Expenditures Price Index would ease to 2.5% this year and return to the 2% target in 2027. The PCE measure was 2.9% in December.
Williams highlighted recent New York Fed research showing that the burden of U.S. import tariffs is borne primarily within the United States rather than by foreign producers, noting that the effect is "overwhelmingly" domestic. That research has previously drawn heated criticism from the Trump administration.
Key points
- Williams confirmed that the Fed's current policy stance is intended to stabilize the labor market and return inflation to 2%.
- He said further federal funds rate reductions could be warranted if inflation follows the path he expects; markets have reduced expectations for cuts amid higher energy prices tied to the Iran conflict.
- Williams projected 2.5% GDP growth this year, citing fiscal stimulus, favorable financial conditions, and strong investments in artificial intelligence as supportive factors.
Risks and uncertainties
- Higher energy prices driven by the U.S. and Israeli military actions in Iran could push inflation above current forecasts, complicating plans for rate cuts - sector most directly affected: energy and inflation-sensitive goods.
- Markets are already pricing out some expected policy easing this year, reflecting uncertainty for financial markets and interest-rate-sensitive sectors such as banking and housing.
- Tariff-driven inflation, while expected to wane, has been a notable contributor to price pressures this year; trade-exposed sectors and domestic consumers face related cost impacts.