Federal Reserve "third-in-command": Starting to consider the impact of tariffs on prices, currently no need to adjust policy

On Tuesday, Federal Reserve "number three," New York Fed President John Williams stated that he is beginning to consider the impact of Trump's tariffs on prices. He expects that tariffs will have some effect on inflation, but he emphasized that there is still a great deal of uncertainty surrounding the impact of tariffs. Williams also mentioned that there is currently no need to adjust monetary policy.

Williams highlighted the tariffs and their uncertainty:

Based on the information we have today, considering the many uncertainties involved, I have currently taken into account some of the tariffs' effects on inflation and prices, and I believe we will see these effects later this year.

You also have to consider how this will affect economic activity—changes in business investment decisions, consumer spending, and so on. I think that is another major source of uncertainty.

Williams noted that after tariffs were imposed on certain goods in 2018, businesses passed the tariff costs onto customers. While companies are better at passing on price increases, he pointed out that many consumers are also more sensitive to price changes.

When asked whether Federal Reserve policymakers would consider adjusting interest rates at this month's meeting, Williams stated that the current monetary policy is in good shape, and he believes there is no need to immediately change borrowing costs. He described the current policy as "moderately tight" and reiterated his expectation that inflation will gradually move toward the Federal Reserve's 2% target over time.

Williams stated that he is closely monitoring inflation expectations and noted that discussions about tariffs are influencing consumers' expectations regarding recent price increases. However, he added that in most surveys, he has not seen much evidence indicating that this is related to long-term inflation or future inflation.

At the FOMC meeting in January, the Federal Reserve decided to keep interest rates unchanged. Officials indicated that they want to maintain stable rates until they see more evidence that inflation is moving toward the 2% target. The Federal Reserve's next FOMC meeting will be held on March 18-19.

Williams expects that the U.S. economy will continue to grow well this year, although the growth rate may be lower than last year.

Since late February, U.S. stocks have experienced significant sell-offs, reflecting growing investor concerns about Trump's tariffs. Due to worries that U.S. tariff actions could drag down global economic growth, traders have increased their bets on interest rate cuts by the Federal Reserve and the European Central Bank this year. The money market has fully priced in expectations for three rate cuts by the Federal Reserve this year, each by 25 basis points, marking the first time since mid-December last year.

Analysts point out that the escalating trade conflict, combined with data indicating a slowdown in the U.S. economy since the beginning of the year, has heightened market concerns. Federal Reserve officials may soon face a situation where economic growth slows and inflation exceeds targets. This scenario could force policymakers to make difficult choices between employment and price stability.

Chicago Fed President Charles Evans stated in another interview on Tuesday that businesses in his region have told him that long-term tariffs will force them to raise prices. Evans's region includes Detroit, a hub for automobile manufacturing.

Evans stated, "We must slow down the pace of interest rate cuts until we can perceive whether this will be a temporary shock? How significant will this shock be? And how will the response from other parts of the world be?"