Tariff Impact Just Beginning! Fed’s No. 3: U.S. Economic Growth Will Slow to Around 1% This Year, Unemployment Rate to Rise to 4.5%

John Williams, President of the Federal Reserve Bank of New York and the Federal Reserve’s third most influential official, delivered a keynote speech at the New York Association for Business Economics, analyzing the challenges facing the U.S. economy and issuing a clear warning about the effects of tariffs. This closely watched address not only revealed insights into the Fed’s future monetary policy direction, but also sounded the alarm for upcoming economic turbulence.

Williams explicitly stated that current Fed monetary policy is in an “appropriately moderately restrictive” stance. This policy setting supports economic stability while giving the Fed sufficient space to observe economic trends.

“Maintaining this mildly restrictive monetary policy stance is fully appropriate to achieving our goals of maximum employment and price stability,” said Williams.

His remarks imply that the Fed is unlikely to significantly adjust interest rates in the short term. Instead, it prefers to maintain the current stance and use data-driven decisions to find the optimal balance.

The speech also focused heavily on the impact of trade tariffs. Williams warned that the effects of tariffs on the U.S. economy are “just beginning,” with the full impact expected to emerge over the coming months.

Williams projected that tariffs will push inflation up by approximately 1 percentage point in the second half of this year and the first half of next year, placing notable upward pressure on consumer prices. Importantly, this impact will not be immediate, but will gradually permeate all aspects of the economy—affecting supply chains, consumer confidence, and business costs.

Regarding inflation and economic growth, Williams offered detailed forecasts. He expects inflation to range between 3% and 3.5% this year, gradually declining to around 2.5% by 2026 and eventually reaching the Fed’s long-term 2% target by 2027. Short-term data suggests June’s overall inflation rate is estimated at 2.5%, with core inflation at 2.75%.

On the economic growth front, Williams forecasts that U.S. GDP growth will slow to about 1% this year, and the unemployment rate may rise from the current 4.1% to 4.5% by year-end.

While cautiously optimistic about the economic outlook, Williams acknowledged that the U.S. economy is in a good position and the labor market remains solid. However, he warned that tariffs and other external factors could pose downside risks to growth and employment.

“We are facing ongoing uncertainty, and we cannot underestimate the impact of tariffs,” Williams emphasized.

As for the Fed’s next moves, his remarks also provided key clues. Although the Fed hinted at two possible rate cuts later this year in its last meeting, there is division in the market over whether a rate cut will occur at the end of this month. Williams did not clearly support either side, but his cautious tone suggests the Fed may adopt a wait-and-see approach until more economic data becomes clear.

His speech highlights the Fed’s prudent stance amid today’s complex economic environment. Confronted with the uncertainty brought by trade frictions, the Fed is trying to strike a delicate balance between controlling inflation and sustaining economic growth.

Analysts note that Williams’ remarks offer important guidance for understanding the Fed’s future policy path and signal that the U.S. economy may face additional challenges ahead.