Fed's Williams: Tariffs May Push Up Inflation, Rate Policy in Good Place

In remarks at Pace University on February 11, New York Fed President John Williams discussed the economy and monetary policy, highlighting the potential impact of tariffs on inflation and the current stance of rate policy. Williams acknowledged that while the U.S. economy is in a good place, with the labor market stabilizing and inflation gradually easing, the potential impact of tariffs on prices is a concern.

Williams noted that the University of Michigan's consumer sentiment survey showed that Americans are now fearful of higher inflation on the horizon due to Trump's tariffs. This increase in inflation expectations could lead to changes in consumer behavior, such as increased spending, which could further drive up prices. Economists are concerned that tariffs, which are essentially taxes on American consumers, will increase prices in the United States, at least temporarily, and over time slow economic growth.

However, Williams expressed confidence in the Fed's current monetary policy stance, stating that it is well positioned to achieve the FOMC's dual mandate goals of maximum employment and price stability. He noted that the modestly restrictive stance of policy should support the return to 2 percent inflation while sustaining solid economic growth and labor market conditions. Nevertheless, he emphasized that the economic outlook remains highly uncertain, particularly around potential fiscal, trade, immigration, and regulatory policies.

Williams also discussed the Fed's balance sheet strategy, which has not changed. He expects real GDP growth to move to around 2 percent in 2025 and 2026, which is near his estimate of its long-run potential rate. The unemployment rate is expected to remain essentially flat at around 4 to 4-1/4 percent, and overall inflation is expected to remain around 2-1/2 percent this year, then decline to the FOMC's 2 percent goal in the coming years.

In conclusion, while President Williams acknowledges the potential impact of tariffs on inflation, he remains confident in the Fed's current monetary policy stance. The Fed will continue to monitor the evolving economic landscape, particularly in response to tariffs and their potential effects on inflation, and adapt its policy as needed to maintain its dual mandate goals of maximum employment and price stability.