Fed’s Williams: tariff effects have been modest so far but are expected to grow over time. Says tariffs could raise inflation by one percentage point through late 2025 into 2026.

Fed’s Williams: tariff effects have been modest so far but are expected to grow over time. Says tariffs could raise inflation by one percentage point through late 2025 into 2026.

Title: Fed’s Williams: Tariff Effects Modest So Far, but Expected to Rise Over Time

In a recent speech, Federal Reserve Bank of New York President John Williams discussed the impact of tariffs on the U.S. economy. Williams noted that while the initial effects of tariffs have been relatively modest, he expects their influence to grow over time, potentially boosting inflation by one percentage point by the end of 2025 and into 2026 [1].

Williams highlighted that the soft data, such as regional business surveys and consumer expectations, have shown elevated uncertainty due to trade policy changes. This uncertainty has led to a reported pullback in capital spending and a reduction in expected spending growth on nonessential items. However, he pointed out that longer-run inflation expectations have remained stable, which is crucial for sustained price stability.

On the hard data front, Williams stated that the U.S. economy remains in a good place, with real GDP growth slowing relative to last year's pace. The labor market remains solid, with measures of unemployment, employment, vacancies, hiring, and quits showing a well-balanced supply and demand. Inflation, while bumpy, is on a gradual downward path toward the 2 percent longer-run goal.

Williams emphasized that while the effects of tariffs on core goods prices are evident, their broader impact on the economy is still developing. The initial effects of tariffs on prices have been well above past trends for items like household appliances and musical instruments. However, the full impact of tariffs is expected to become more pronounced in the coming months.

The Federal Open Market Committee (FOMC) has maintained a neutral stance on monetary policy, keeping the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent. This allows for a close analysis of incoming data and an assessment of the evolving economic outlook.

Williams concluded by noting that while the economic path remains uncertain, he expects real GDP growth this year to be around 1 percent, with the unemployment rate rising to around 4-1/2 percent by the end of the year. He anticipates inflation to be between 3 and 3-1/2 percent in 2025, falling back to about 2-1/2 percent in 2027.

In a separate development, Reserve Bank of India (RBI) Governor Sanjay Malhotra indicated that the central bank may consider rate cuts if inflation and growth continue to decline. Malhotra noted that the MPC's neutral stance provides flexibility to respond to evolving conditions. The central bank is closely monitoring inflation trends and economic data to inform future policy decisions [2].

References:
1. [NUMBER: 1] https://www.newyorkfed.org/newsevents/speeches/2025/wil250716
2. [NUMBER: 2] https://timesofindia.indiatimes.com/business/india-business/rbi-governor-signals-theres-room-for-rate-cut-as-inflation-drops/articleshow/122549300.cms