New York Federal Reserve President John Williams cautioned Friday that recently announced tariffs are likely to drive inflation significantly higher this year while simultaneously putting pressure on economic growth and employment.
Speaking to the Puerto Rico Chamber of Commerce, Williams said the new trade measures are contributing to a growing sense of economic uncertainty, making it harder to predict how conditions will evolve in the months ahead.
“Given the uncertain effects of recently announced tariffs and other policy changes, there is an unusually wide range of outcomes that could transpire,” he said.
Williams now projects that inflation could rise to between 3.5% and 4% in 2025, up from February’s 2.5% annual rate measured by the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index.
At the same time, real GDP growth is expected to drop below 1%, a sharp deceleration from last year’s pace, while the unemployment rate could increase from its current 4.2% to between 4.5% and 5%. The combination of tighter labor supply—exacerbated by reduced immigration—and heightened trade uncertainty are seen as contributing factors.
Despite the increasingly complex environment, Williams said current monetary policy remains appropriate, emphasizing that interest rates are at a "modestly restrictive" level. The Fed's benchmark rate is currently set between 4.25% and 4.50%.
While markets continue to anticipate potential rate cuts later this year, Williams signaled caution, especially in ensuring inflation expectations over the longer term remain well anchored.
“It’s critical that we don’t let longer-run expectations of price pressures become unmoored,” he said, acknowledging that short-term expectations have ticked up recently.
Still, Williams dismissed fears that the current climate resembles the stagflation of the 1970s, noting that although inflation and unemployment may rise, today’s conditions are far less severe.
“This is not stagflation,” he said. “I’m old enough to remember the 1970s and early 1980s. That was a period of double-digit inflation and unemployment. We’re nowhere near that, and we’re committed to keeping it that way.”
As the central bank continues to monitor incoming data, Williams emphasized the importance of flexibility and vigilance, given the volatile policy backdrop and evolving economic risks.
