Trade Policy Will Add to Risks of Slower Growth: Fed's John Williams

Federal Reserve Bank of New York President John Williams said keeping inflation expectations anchored near policymakers’ target forms the “bedrock” of central banking.

A “critical lesson” for central bankers is “the importance of maintaining well-anchored inflation expectations, especially when uncertainty is very high,” Williams said at a conference in Reykjavik, Iceland.

John Williams

Williams’ remarks come as the US central bank is confronting a possible scenario in which its two mandates — maintaining price stability and maximum employment — come into conflict.

Consumers’ expectations for inflation in the medium term spiked in April, according to a New York Fed survey. Household views on the jobs market also deteriorated.

At the same time, President Donald Trump is placing increased pressure on policymakers to cut interest rates to support the economy against the impact of tariffs on growth and the labor market.

Williams’ comments suggest he’s especially attentive to the inflation side of the Fed’s mandate. That aligns with recent remarks from Fed Chair Jerome Powell, who said sustained full employment cannot be achieved without maintaining price stability.

“Today, regardless of economic shocks, changes in government policies or swings in globalization and deglobalization, central banks recognize that maintaining price stability is their job: They are the protectors of price stability,” Williams said. He added that by effectively delivering on their mandate “central banks have earned credibility with the public.”

Fed officials held borrowing costs steady earlier this week despite rising risks of higher unemployment and inflation. Policymakers are waiting to gain clarity on how an aggressive set of tariffs will shape the economy.

“There’s no doubt that uncertainty will continue to be the defining characteristic of the monetary policy landscape for the foreseeable future,” Williams said.

In an interview with Bloomberg Television with Francine Lacqua following his speech, Williams said talk about preemptive rate cuts was “misplaced” as the current economic environment remains uncertain.

He also  said he estimates the inflation-adjusted neutral rate of interest — the level at which policy neither stimulates nor restricts the economy — was around 0.75% to 1%. In light of that, he said policy currently remains “modestly restrictive.”

Asked about consumer spending, Williams said the picture is split between encouraging, but backward looking “hard data,” and worrying forward-looking survey data.

“The actual consumer spending has held up pretty well, but we are hearing more reports from businesses and others, consumers are starting to pare back some of that discretionary spending,” he said.

In a separate question-and-answer session following his speech, Williams said he expected economic growth in the US this year to be “considerably slower” than in 2024. He also anticipates higher inflation and unemployment.

Speaking earlier Friday in Reykjavik, Fed Governor Adriana Kugler said policymakers should hold interest rates steady for now, pointing to a stable US economy and uncertainty around tariffs.

“Overall we see health still in the real economy, so that gives us time to make sure that we continue to make progress on inflation, and we keep our inflation expectations very well anchored,” Kugler said Friday during a Bloomberg Television interview.

Fed Governor Michael Barr, also in Reykjavik, warned the administration’s trade policies could generate persistent inflationary pressures and higher unemployment.

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