(March 31): Federal Reserve Bank of New York president John Williams said interest rates were well positioned amid signs of significant supply chain disruptions due to war in the Middle East.
“The conflict in the Middle East could result in a large supply shock with pronounced effects” that both boost price pressures but also dampen economic activity, he said. “This has begun to play out already,” Williams added, pointing to disruptions in the supply of energy and related goods.
Yet Williams signaled the best response by the Fed, at least for now, was no response.
“The current stance of monetary policy is well positioned to balance the risks to our maximum employment and price stability goals,” Williams said Monday in prepared remarks in an event organized by the Staten Island Economic Development Corporation.
A spike in energy prices as a result of the war in Iran has raised new risks for both of the Fed’s policy goals. After holding interest rates steady earlier this month, some Fed officials are voicing fresh concerns about inflation while others favor a patient approach in assessing fallout from the now month-long war.
“Uncertainty around the future path of inflation is high,” Williams said.
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He expects higher headline inflation in coming months driven by a significant increase in energy prices. But the move should partially reverse later this year, he said, assuming hostilities in the Middle East cease and prices come down.
He forecasts inflation at the end of 2026 will be 2.75%.
The New York Fed chief said he expects the economy will grow 2.5% this year, with tailwinds from fiscal policy, favorable financial conditions and investments in artificial intelligence. The labor market “has been sending an unusual set of mixed signals” but the unemployment rate should edge down amid higher growth, he said.
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Earlier on Monday, Fed chair Jerome Powell said it was still too early to assess the economic impact of the war in Iran, and monetary policy remained in a “good place”.
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