New York Fed President Williams worries war will slow growth, aggravate inflation
New York Fed President John Williams expressed concerns on Thursday about the impact of the Iran war on the economy, saying it was already showing signs of rising prices and slowing growth.
In a speech to bankers in his district, Williams said the conflict had “intensified uncertainty” about national and local conditions.
While he expressed confidence that overall growth will continue and inflation will decline throughout the year, he said there are threats to both sides of the Fed’s dual mandate of stable prices and low unemployment.
“Assuming energy supply disruptions ease within a reasonable period of time, energy prices should fall and these effects could partially reverse later this year,” Williams said. “But this conflict could also result in a major supply shock with significant effects of increasing inflation and slowing economic activity through increases in intermediate costs and commodity prices. This is already starting to have an impact.”
Such a situation (slow growth and high prices) is commonly referred to as stagflation and presents a toxic mix for central bank policymakers, who must choose which side to prioritize.
Fed Chairman Jerome Powell recently rejected this characterization of the U.S. economy, but Williams’ comments suggest that it remains a concern for policymakers, albeit in a lesser sense than the severe period that was prevalent in the late 1970s and early ’80s.
Williams noted that there are “increasing disruptions” in supply chains, especially regarding energy and related goods. New York Fed’s own Global Supply Chain Pressure Index It showed that conditions in March were the most challenging since the beginning of 2023.
“Rising energy prices not only show up in rising fuel costs, but there are also switching costs in the form of higher airline tickets, food, fertilizer and other consumer products,” he said.
Under current circumstances, monetary policy “is well positioned to offset risks to our goals of maximum employment and price stability,” Williams said.
The Federal Open Market Committee, of which Williams is a permanent voting member, decided in March to remain on hold, targeting the benchmark interest rate between 3.5% and 3.75%. Markets are pricing in a 100% probability that the committee will remain on hold at its meeting on April 28-29, and in fact they do not expect any cuts this year.
Williams did not commit to a future policy stance. While he states that the outlook is “highly uncertain,” he predicts real gross domestic product will still run 2-2.5% this year, while inflation will be around 2.75%-3%, eventually returning to the Fed’s 2% target in 2027. Williams noted that long-term inflation expectations are largely under control.
