NY Fed's Williams: No Evidence Tariffs Boosting Inflation, Rate Cuts 'Will Become Appropriate'

No Major Inflation Uptick from Tariffs, Rate Cuts On the Horizon

New York Federal Reserve President John Williams said Thursday there is no clear evidence that higher tariffs on imported goods have led to a broad increase in overall inflation. He also predicted that, over time, interest rate cuts "will become appropriate," but did not specify a timeline or pace for the cuts.

Speaking at the Economic Club of New York, Williams stated: "We haven't seen any signs yet that tariffs are leading to amplified or second-round effects on overall inflation trends." These remarks align with Federal Reserve Chair Jerome Powell’s stance at the Jackson Hole symposium, where Powell hinted at the possibility of interest rate cuts.

Williams' conclusion that "inflation hasn't heated up" removes a potential obstacle for the Fed to cut rates as early as this month. Similar to Powell's statements, Williams emphasized a cooling labor market. He noted that higher interest rates have already led to a slowdown in the labor market, evidenced by recent Labor Department data showing a significant deceleration in U.S. job growth since May.

Interest Rate Impact on Labor Market

Williams stated that one question Fed officials must consider is whether maintaining the current interest rate stance will cause unnecessary damage to the labor market. He cautioned that "keeping an overly restrictive policy in place for too long may increase risks to a stable, healthy labor market.”

From a broader perspective, Williams expects U.S. economic growth to continue to slow in the coming months. “I anticipate that the combined effects of trade and immigration policies, along with related uncertainties, will continue to weigh on economic growth,” he said, forecasting the unemployment rate to gradually rise to around 4.5% by next year.

Concerns over Sudden Unemployment Spike

Powell expressed concern at the Jackson Hole symposium about a sharp, sudden increase in the unemployment rate. Past economic cycles show that once the labor market begins to contract, it can become significantly weakened.

Williams' inflation forecasts were more moderate. He said inflation may temporarily rise above 3% in the near term, but will decline to 2.5% by 2026, and to 2% by 2027, the Fed's inflation target.

Looking ahead, Williams said, “If our dual mandate goals continue to progress as I expect in my baseline outlook, I anticipate that over time, adjusting the stance of interest rates toward a more neutral posture will be appropriate.”

Market Expectations and Potential Rate Cut

Derivatives market traders are anticipating the Fed will cut interest rates at its next meeting on September 16-17. U.S. President Donald Trump has been urging the Fed to cut rates for months, even sarcastically calling Powell “too slow.”

Fed officials have artificially kept interest rates high this year to put downward pressure on inflation. Higher interest rates discourage borrowing, leading to downturns in interest-sensitive industries like real estate and automobiles, while also slowing economic growth.

After the September meeting, the path of interest rates becomes less clear. Fed Governor Waller is considered a strong contender to replace Powell as Fed Chair next year. He stated this week that the Fed should implement a series of rate cuts in the next three to six months.

But most other officials, including Williams, have remained cautious. He said in his speech that the impact of tariffs on inflation has so far been less than initially feared, but he added that “it’s still early days, and these effects take time to fully materialize.”