New York Fed President Speaks: The Impact of the War Is Still to Be Seen, The Door to Rate Cuts Is Not Closed

The latest statement from New York Fed President John Williams indicates that the impact of a U.S.-Israel attack on Iran on the economy will depend on asset prices, especially how long oil prices remain disrupted.

On Tuesday, March 3, local time, Williams was asked about the potential impact of this round of conflict on U.S. inflation and said, “We need to see how long this impact lasts.” So far, the shocks to financial markets have been “quite moderate.”

Last weekend, the U.S. and Israel launched a preemptive military strike against Iran, which Iran immediately retaliated against, affecting several Middle Eastern countries including the UAE, Qatar, Bahrain, and Iraq.

During the day, Brent crude oil futures briefly surged above $85 per barrel, reaching the highest level since July 2024. As investors assess the long-term conflict in the Middle East and its potential impact on U.S. inflation, the dollar index and U.S. Treasury yields also rose in tandem.

Williams said it is too early to make a broader assessment of how the Iran conflict will affect the global economy.

He mentioned that once tariffs’ impacts largely fade and inflation further slows, it would be appropriate for the central bank to continue easing monetary policy.

“If inflation trends as I expect, further reductions in the federal funds rate will be necessary in the future,” he said, adding that this would prevent monetary policy from unintentionally becoming more restrictive.

He also noted that tariffs will continue to exert some additional pressure on consumer prices in the first half of this year, after which inflation is expected to fall to 2.5% by the end of 2026 and retreat to 2% in 2027.

Williams further mentioned that recent months have shown “encouraging signs of stability” in the labor market, with unemployment rates likely to continue declining slightly over the next two years. He projects U.S. economic growth of about 2.5% this year.

“Given that there has been no second-round inflation effect and inflation expectations remain firmly anchored, I expect the impact of tariffs on prices to be mainly one-off,” he said, adding that the peak impact of tariffs will “dissipate later this year.”

However, since the full effects of tariffs have not yet fully materialized, progress toward the Fed’s 2% inflation target is “temporarily stalled.”

More Fed officials are pointing out that, following a rebound in hiring and a decline in unemployment in January, the labor market is showing signs of stability.

Many policymakers currently prefer to wait for more evidence confirming that inflation is returning to the 2% target. But a few are concerned that employment growth is not broad enough and may still require further rate cuts.

Williams concluded by saying that the labor market remains in an unusual state of “low hiring and low layoffs.” He also noted that household survey sentiment is more pessimistic, which provides policymakers with a “cautionary signal.”

(Source: Caixin Global)