Federal Reserve Official Warns of Persistent Inflation Risk

John Williams, the President of the Federal Reserve Bank of New York, emphasized the importance of central banks taking decisive action to prevent inflation from becoming highly persistent. Speaking at a conference in Tokyo, Williams, who also serves as the Vice Chairman of the Federal Open Market Committee (FOMC), warned that allowing inflation expectations to deviate from their targets poses a significant risk.

Williams highlighted that central banks must avoid measures where the costs of being wrong far outweigh the benefits, especially given the uncertainties surrounding U.S. tariff and trade policies. He stressed that while short-term shocks typically do not have long-term effects on inflation, the impact of supply-side shocks, such as those caused by the COVID-19 pandemic, remains uncertain.

“You want to avoid inflation becoming highly persistent because it could become permanent. When inflation starts to deviate from the central bank's target, you need to respond relatively strongly,” Williams said. He added that central banks must not only stabilize long-term inflation expectations but also ensure that short-term expectations perform well, so that public perceptions of future price trends return to the central bank's target within a few years.

Since the Federal Reserve cut interest rates by 100 basis points in the latter half of last year, it has maintained the federal funds rate target range at 4.25% to 4.5%. However, the unpredictable nature of President Trump's tariff policies has complicated the task of controlling inflation for central bank officials. Despite the significant market volatility and shocks experienced in April following Trump's announcement of reciprocal tariffs, Williams noted that there was no market meltdown.

“One thing you definitely saw in April was a lot of flow between buyers and sellers, which is a sign that the market is functioning,” he said. Williams also pointed out that based on various indicators monitored by the New York Fed, the U.S. reserve levels are “clearly adequate” to absorb unexpected shocks. “When you encounter a major shock and see an unexpected shock, it's great to have a buffer to absorb the market impact,” he added.