New York Fed's Williams: Further rate cuts depend on inflation progress; tariff impact is a "one-off shock".

Tariff shocks and inflation trends are becoming key variables for the Federal Reserve’s next move. New York Fed President John Williams said on Tuesday, If inflation continues to decline after the effects of tariffs gradually fade, the Fed will have reason to further cut interest rates.

Williams expects tariffs will put extra pressure on consumer prices in the first half of this year, after which the inflation rate will fall to 2.5% by the end of 2026 and return to the 2% target level in 2027. He emphasized, Given well-anchored inflation expectations and the absence of second-round effects, tariffs mainly bring a one-off price shock, with the peak impact expected to pass later this year.

Regarding the labor market, Williams noted the recent emergence of “encouraging signs of stability” and, supported by “robust” economic growth, expects the unemployment rate to continue a slight downward trend over the next two years. He expects economic growth this year to be around 2.5%.

Tariff Shocks Seen as “Transient Effects”

In a prepared speech for an event in Washington, New York Fed President Williams explicitly expressed a conditional stance on rate cuts. He said:

“If inflation develops in the direction I expect, there will eventually be reason to further reduce the federal funds rate to prevent monetary policy from inadvertently becoming more restrictive.”

Regarding the impact of tariffs on prices, Williams characterized them as a “one-off shock.” He pointed out that since no second-round inflation effect has emerged and long-term inflation expectations remain stable, tariffs mainly bring temporary price fluctuations, with their peak impact expected to fade “later this year.”

However, he also admitted that the full impact of tariffs has not yet completely emerged, and the Fed’s process to achieve the 2% inflation target has “temporarily stalled.”

Labor Market Shows “Low Hiring, Low Firing” Pattern

New York Fed President Williams described the current job market as an “unusually low-hiring, low-firing” state, with the overall pattern tending toward stasis. He pointed out that household surveys show pessimism, providing “warning signals” that policymakers need to consistently monitor.

According to Bloomberg, Fed officials are gradually forming a consensus: The rebound in employment and decline in the unemployment rate in January are evidence of stabilization in the labor market. Most officials believe it is necessary to wait until inflation moves closer to the 2% target before taking action. However, a few officials worry that broad-based job creation is still insufficient, believing further rate cuts are needed to improve the situation.

Overall, Williams’ statements reflect the Fed’s current cautious tone: Against the backdrop of tariff uncertainties and temporarily stalled inflation progress, any policy adjustments must be data-driven.

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