New York Fed President William Williams on Thursday expressed concern about the impact of the Iran war on the economy, saying there were already signs of rising prices and slowing growth.
In a speech to local bankers, Williams said the conflict had “increased the uncertainty” surrounding the national and local situation.
While he generally expressed confidence that growth will continue and inflation will ease throughout the year, he said there are threats to both of the Fed’s dual mandates of price stability and low unemployment.
“Assuming energy supply disruptions ease fairly quickly, energy prices should fall and these effects should partially recover in the second half of this year,” Williams said. “However, conflict could also cause large-scale supply shocks with noticeable effects, while at the same time raising inflation through higher intermediate costs and commodity prices and suppressing economic activity, which is already beginning to have an impact.”
This situation, low growth and high prices, is commonly referred to as stagflation, and creates a toxic combination for central bank policymakers, who must choose which to prioritize.
Although Federal Reserve Chairman Jerome Powell recently rejected this characterization of the U.S. economy, Williams’ comments indicate that it remains a concern for policymakers, even if it diminishes the severe episodes that prevailed in the late 1970s and early 1980s.
Williams noted “increasing disruption” in supply chains, particularly for energy and related products. Conditions in March were the most tense since early 2023, according to the New York Fed’s proprietary Global Supply Chain Pressure Index.
“Higher energy prices are not only reflected in higher fuel costs, but also pass-through costs in the form of higher prices for airfare, food, fertilizer and other consumer products,” he said.
Williams said that in current circumstances monetary policy is “well placed to balance the risks to our maximum employment and price stability objectives”.
The Federal Open Market Committee, of which Williams is a standing voting member, decided in March to keep interest rates unchanged, with a target rate of 3.5% to 3.75%. Markets are pricing in a 100% chance that the committee will leave the rate unchanged again at its April 28-29 meeting, and in fact do not expect any cuts to occur this year.
Mr. Williams did not specify his future policy stance. He said the outlook is “very uncertain,” but he expects real gross domestic product (GDP) to remain between 2% and 2.5% this year and inflation to be around 2.75% to 3%, eventually returning to the Fed’s 2% target in 2027. Williams said long-term inflation expectations are largely subdued.
