MNI: Fed's Williams Supports Maintaining Restrictive Stance

New York Federal Reserve President John Williams said Wednesday he supports holding interest rates steady and pointed to recent inflation data that he said are only beginning to show increased price pressures. 

"The combination of continued uncertainty, a solid labor market, and inflation still above our 2% goal led the FOMC to decide to leave the target range for the federal funds rate unchanged at 4.25 to 4.5% at its most recent meeting last month," he said in prepared remarks. 

"Maintaining this modestly restrictive stance of monetary policy is entirely appropriate to achieve our maximum employment and price stability goals," Williams said. "It allows for time to closely analyze incoming data, assess the evolving outlook, and evaluate the balance of risks to achieving our dual mandate goals." 

The most recent data show a solid labor market but job growth and labor supply are slowing, Williams, the vice chair of the FOMC, said. Inflation has continued on a bumpy downward path toward the central bank's 2% longer-run goal, he said, estimating the 12-month percent change in headline PCE inflation in June at 2.5% and core inflation at 2.75%. (See: MNI INTERVIEW: Bostic Backs Go-Slow On Rates As Tariffs Linger) 

But Williams expects tariffs and uncertainty to restrain spending and reduced immigration to slow labor force growth. He sees GDP growth of about 1% this year and for unemployment to rise from the current 4.1% to around 4.5% by yearend. 

INCREASING TARIFF IMPACTS

"I anticipate inflation will come in between 3 and 3.5% in 2025, and then fall back to about 2.5% next year before reaching 2% in 2027," he said in a speech to the New York Association for Business Economics.

Williams expects the effects of tariffs on inflation to increase in coming months. "Overall, I expect tariffs to boost inflation by about 1 percentage point over the second half of this year and the first part of next year." The lower foreign exchange value of the dollar likely will add somewhat to inflationary pressure going forward as well, he said.

"We are seeing initial effects of tariff increases on core goods prices," the New York Fed president said, pointing to items that are more exposed to higher tariffs, such as household appliances, musical instruments, luggage, and tableware. 

"It's important to note that it’s still early days for the effects of tariffs, which take time to come into full force." (See: MNI INTERVIEW: Fed's Daly: Time To Think About Adjusting Rates)

"Combining enacted and announced tariffs, estimates of the resulting average effective tariff rate range somewhere between 15 and 20%," he said. "But actual tariffs in effect in recent months were much smaller than that, as seen by the amount of tariff revenue collected each month. Net tariff receipts as a share of imports rose from about 2.25% in the first three months of the year to about 8% in May."