John Williams, president of the Federal Reserve Bank of New York, says current interest rates are appropriately “modestly restrictive,” allowing the Fed room to assess incoming economic data. He cautions, however, that the full effects of recently imposed tariffs have not yet been felt and that those effects are still working their way through the economy.
Williams estimates that tariffs will add roughly 1 percentage point to inflation through early next year. That boost could lift headline inflation to about 3.5% in the near term, before gradually easing toward 2.5% in 2026. He projects a return to the Federal Reserve’s 2% inflation target only by 2027. At the same time, Williams expects gross domestic product growth to slow to about 1% and for the unemployment rate to edge up to roughly 4.5% by the end of the year.
Federal Reserve officials broadly expect to be able to cut interest rates later this year if inflation moves sustainably toward target, but they are proceeding cautiously. Policymakers want to determine whether the anticipated tariff-driven spike in inflation will prove transitory or more persistent before making adjustments to the policy path. That caution reflects the Fed’s dual mandate to foster maximum employment while keeping inflation near its 2% goal, and underscores the importance of monitoring incoming labor market and price data as tariff effects unfold.