Federal Reserve's Williams: Middle East War Will Drive Up Inflation, No Need to Adjust Interest Rate Policy for Now

New York Fed Chair William said Tuesday that the energy shock triggered by the war in the Middle East will push up overall inflation within this year, while also reiterating that the current monetary policy stance is sufficient to deal with changes facing the U.S. economy.

In an interview that day, Williams said: The impact of this war will be reflected directly in overall inflation, because energy prices are an important component of it. I expect overall inflation to actually rise in midyear this year." He added that the full-year inflation rate will reach around 2.75%.

In the short term, as the Middle East war shock unleashed by U.S. and Israel’s military action against Iran gradually filters through into the economic system, Williams said inflation could break above 3%, and noted that markets currently also expect this to happen. He said he is closely watching the trajectory of core inflation; the energy shock will also lift these prices, but by a smaller amount.

“Overall, my stance is consistent with what I’ve been holding for some time, and this year the core inflation rate is around 2.5%,” Williams said, with core inflation excluding food and energy prices.

In the interview, Williams reiterated that he believes there is currently no need to adjust monetary policy settings. The Federal Reserve’s current target range for the interest rate is 3.5% to 3.75%, and officials at last month’s policy meeting expected that there would be one 25-basis-point rate cut this year.

“Given all these developments, monetary policy is indeed in a very favorable position right now, so we can take a wait-and-see approach to what is happening,” Williams said. “I’m not saying we’re in some kind of ‘in a position where we can’t act.’ On the contrary, I think this monetary policy is in exactly the position it needs to be.”

Williams said that the war’s impact and the resulting price increases may slightly weigh on economic growth, because consumers will be forced to spend more on energy. He also said that in the current economic environment of “low hiring, low layoffs,” he expects the unemployment rate to remain basically stable going forward.

He said: “I have lowered my growth outlook for this year; this year’s growth could be between 2% and 2.5%, and the unemployment rate may stay near its current level.”

In addition, Williams also said that uncertainty surrounding the confirmation of Kevin Warsh as chair of the Federal Reserve, and the possibility that the current chair, Powell, may need to remain in office longer, will not affect the work of the Federal Reserve.

“I just want to emphasize the most important point, which is that we are focused on doing our job well. There is no problem with continuity.”

Trump has nominated Warsh to replace Powell, whose chair term expires on May 15. But a key Republican senator vowed to block Warsh’s confirmation process unless the Department of Justice drops its investigation into the Federal Reserve. And prosecutors at the Department of Justice currently have no intention of backing down.

Powell’s term as a governor will not end until 2028, and he has also pledged to remain at the Federal Reserve until the investigation is resolved “in a transparent and final manner.” If Warsh fails to be confirmed before May 15, Powell said he expects to serve as acting chair.

（Source: Caixin）