For the second time this month, New York Fed President John Williams expressed concern about the Iran war’s impact on the economy, saying it already has shown signs of slowing growth and raising prices.
In a speech delivered Thursday to bankers in his home district, Williams said that the conflict has “intensified the uncertainty” around national and local conditions. On April 2, Williams made similar remarks during an interview on Fox Business.
While he generally expressed confidence that growth would continue and inflation would ease through the year in his speech Thursday, Williams said there are threats to both sides of the Fed’s dual mandate for stable prices and low unemployment.
“Assuming energy supply disruptions ease reasonably soon, energy prices should come down, and these effects should partially reverse later this year,” Williams said. “However, the conflict could also result in a large supply shock with pronounced effects that simultaneously raises inflation — through a surge in intermediate costs and commodity prices — and dampens economic activity. This has begun to play out already.”
CNBC noted that slow growth and high prices is commonly referred to as stagflation and presents a toxic mix for central bank policymakers who would be left to choose which side to prioritize.
The network pointed out that Fed Chair Jerome Powell recently rejected that characterization for the U.S. economy, but Williams’ comments could indicate that it remains a concern for policymakers, if in a reduced sense from the severe episode prevalent in the late 1970s and early 1980s.
‘Increasing Disruptions’
Williams noted that there have been “increasing disruptions” in supply chains specifically concerning energy and related goods. The New York Fed’s own Global Supply Chain Pressure Index showed that conditions in March were the most strained since early 2023, CNBC reported.
“Not only are elevated energy prices showing up in the rising cost of fuel, but there are also pass-through costs in the form of higher airfares, groceries, fertilizer, and other consumer products,” he said.
Under current conditions, Williams said monetary policy “is well positioned to balance the risks to our maximum employment and price stability goals.”
The Federal Open Market Committee, of which Williams is a permanent voting member, decided in March to hold steady on interest rates, with its benchmark rate targeted between 3.5%-3.75%. CNBC noted that markets are pricing in a 100% probability that the FOMC holds steady again at its April 28-29 meeting. The markets don’t expect any cuts this year.
In his speech, Williams didn’t commit to a future policy stance.
He noted that the outlook is “highly uncertain,” but he still sees real gross domestic product advancing at a 2%-2.5% clip this year, with inflation around 2.75%-3% before eventually drifting back to the Fed’s 2% target in 2027. Williams said that longer-term inflation expectations are largely in check.
Williams has been among a group of Fed officials commenting on the economy and the war’s effect on it in recent weeks.
For example, St. Louis Federal Reserve President Alberto Musalem said recently that he doesn’t see a near-term need for the Fed to alter its position on interest rates, but warned of rising inflation risks tied to the war with Iran.
“Policy is well positioned to address risks to both dual mandate objectives, and I expect the current setting of the policy rate will remain appropriate for some time,” Musalem said in the text of a speech delivered before a gathering at the American Enterprise Institute in Washington.
“The economic outlook is highly uncertain,” Musalem said. And while the baseline outlook holds for decent levels of growth, stability in the unemployment rate, and further moderation in inflation, Reuters reported that he added that “uncertainty from the Middle East conflict and unsettled tariff policy could weigh on consumer and business spending in the first half of the year.”
‘Broadly Accomodative’
Musalem also said financial conditions are still “broadly accommodative” and stress in private credit markets largely is contained to that sector and is not a sign of broader woes.
The head of the Federal Reserve Bank of Cleveland said in an interview that she prefers for the central bank to hold its benchmark interest rate unchanged “for quite some time,” but that a rate hike might be possible.
Beth Hammack said recently in an interview with the Associated Press that an interest rate hike could be appropriate if inflation remains persistently above the central bank’s 2% target, the latest sign that some policymakers are moving away from a bias toward reducing borrowing costs.
Hammack also said the Fed might have to cut its rate if higher gas prices caused the economy to slow and unemployment to rise. Should inflation remain elevated, a rate hike could be needed, she said.
“I can foresee scenarios where we would need to reduce rates … if the labor market deteriorates significantly,” Hammack said. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”
Earlier, Chicago Federal Reserve President Austan Goolsbee said in an interview that he’s more worried about inflation now than he is about unemployment.
In the CNBC interview, Goolsbee noted that central bank policymaking is difficult in the current environment.
“The most important thing is to figure out the through line of what is happening,” Goolsbee said in a “Squawk Box” interview. “What makes this a fraught but intense moment is nobody can tell us what is going to happen on the ground in the conflict in the Middle East, and how long that lasts.”
Goolsbee dissented on a rate cut in December and said that he agreed with the majority to hold short-term rates steady at the January and March meetings of the Federal Open Market Committee.
Still Opportunities for Rate Cuts
He is not an FOMC voter this year but will vote again next year. Last week, FOMC officials last week indicated a majority still expect a cut this year and another the next.
Goolsbee said that his inclination will depend on the progress of inflation, and he cautioned against “a repeat of the team-transitory mistake” where the Fed underestimated the severity of inflation in 2021.
Saying there was still opportunity for interest rate cuts later this year, Federal Reserve Governor Christopher Waller recently expressed caution about current economic conditions.
Also, Fed Governor Michelle Bowman said recently that she believes the Fed can cut three times this year, which would take the benchmark federal funds rate below the neutral level that FOMC officials see as neither supporting nor restricting growth.
Waller, who previously advocated for rate cuts, said that recent developments in the labor market, as well as the uncertainty of the war with Iran, require a more conservative approach.
“It doesn’t mean that I’m going to stay put for the rest of the year,” Waller said on “Squawk Box.” “I just want to wait and see where this goes, and if things go reasonably well and the labor market continues to be weak, I would start advocating again for cutting the policy rate later this year.”
In a Fox interview, Bowman took her position even though she said she expects “strong growth” this year, supported by the supply-side policies that this administration is putting into place.”
Concerns Over Housing Continue
Minutes from the Federal Reserve’s last meeting revealed concern among some policymakers about the housing market.
As the housing sector’s slump continues, it has triggered more alarm bells because activity in housing, such as residential investment and construction, often has served as a leading indicator on the overall economy.
Minutes from the Fed’s earlier meetings didn’t include such concerns, MSN reported. But that changed during the July 29–30 gathering.
“Participants observed that growth of economic activity slowed in the first half of the year, driven in large part by slower consumption growth and a decline in residential investment,” the minutes stated.
Housing was just one of several concerns that policymakers raised. Others included the labor market, the effect of tariffs on inflation, real income growth, elevated asset valuations, and low crop prices.
Fed officials also were specific about their housing market worries, suggesting they were starting to pay more attention to the data.
