Investing.com -- New York Federal Reserve President John Williams expressed concerns on Friday about the potential inflationary impact of the Trump administration's current trade policies. He warned that these policies could speed up inflation this year and emphasized the importance of the U.S. central bank's role in preventing long-term expectations of price pressures from becoming unanchored.

While addressing the Puerto Rico Chamber of Commerce, Williams stated that the economic outcomes are unpredictable due to the uncertain effects of the recently announced tariffs and other policy changes. He noted that the strong start of the economy this year could shift towards a less favorable situation due to President Donald Trump's decision to impose heavy import taxes on a broad range of U.S. trading partners.

Williams predicted that the tariffs could push inflation up to between 3.5% and 4% this year, a significant increase from the current level of the Personal Consumption Expenditures Price Index, the Fed's main inflation gauge, which stood at 2.5% year-over-year in February.

He also expressed his concerns about the slowing growth of the labor force due to reduced immigration and the combined effects of uncertainty and tariffs. He anticipates that these factors could significantly slow down real GDP growth from last year's pace, likely to somewhat below 1%. He also expects the unemployment rate to rise from its current level of 4.2% to between 4.5% and 5%.

Despite the rise in short-term inflation expectations, Williams reiterated his commitment to achieving the Fed's 2% inflation target. He also highlighted the importance of the Fed's role in keeping long-term inflation expectations under control.

Williams' outlook of slowing growth, rising unemployment, and higher inflation presents a challenging situation for the Fed as it does not suggest a clear monetary policy response. Financial markets widely expect a series of Fed interest rate cuts to safeguard the economy from downside risks. However, U.S. central bank officials have recently emphasized the importance of preventing inflation from spiraling out of control.

Williams believes that the current monetary policy is in the right place to manage these risks as best as possible, and its "modestly restrictive" level is appropriate given the current level of inflation. He further stated that the current position of the Fed on rates allows the opportunity to assess incoming data and developments, positioning the central bank to adjust to changing circumstances that affect the achievement of its dual-mandate goals.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.