Fed's Williams warns that Fed has to balance inflation and jobs market

Federal Reserve (Fed) Bank of New York President John Williams warned on Thursday that although he expects Fed interest rates to continue declining at a slow pace, the Fed's dual mandate still means the US central bank has to carefully balance supporting the jobs market with interest rate cuts while keeping inflation under control with higher interest rates.

Key highlights

Williams expects gradual interest rate cuts over time if economy meets forecasts.
Fed must balance inflation and job market risks right now.
Monetary policy modestly restrictive, appropriate for current economy.
Trade and immigration factors slowing activity, GDP will grow 1.25-1.5% this year.
Expects jobless rate to rise to about 4.5% next year.
Williams sees PCE inflation between 3.0-3.5% this year, 2.5% in 2026.
Expects inflation to get back to Fed's 2% target in 2027.
Clear signs tariffs are impacting prices, buying patterns.
So far, tariffs don't seem to be pushing long-term inflation rise.
Tariffs likely to add 1.0-1.5% to inflation this year.
Labor market cooling to pre-pandemic trends.
Labor market is currently in balance.
Williams says he is monitoring data to watch for contraction in banking reserves.

Overall trend in services inflation has been favorable.
Core gfoods inflation has shifted higher on tariffs.
Base case is tariffs stay in place, but does consider different scenarios.
Expects tariff impact to play out into the middle of next year.
Fed needs to keep economy on track and allow tariffs to pass through.
Thinks the bond market is relatively calm right now.
Bond market more focused on economic fundamentals right now.
Doesn't see abnormal moves in the bond market.
Interest rates will eventually be lower than current levels.
There is still "a very high level" of reserve in financial system.
Standing repo facility stands ready to help manage liquidity issues if needed.
Treasury and funding markets have functioned very well.