Fed’s Williams Sees U.S. Inflation Hit From Escalating Trade War

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U.S. trade tariffs are already starting to push up inflation and will have a greater impact as they rise, though the U.S. economy is in a “good place” right now, according to Federal Reserve Bank of New York President John Williams.

Williams said in a Bloomberg Television interview that some of his concerns have diminished after the economy “rebounded pretty strongly after a soft patch late last year.” He’s watching sentiment indicators for any signs of nervousness that could undermine the current expansion.

“The economy is well positioned to deal with whatever events happen in the future,” he said.

That includes escalating U.S.-China trade tensions, which have hit global stocks in the past week. Fed officials have kept interest rates on hold since December amid low inflation and global growth concerns, which could return to the fore following the latest developments. Investors now see a good chance of a rate cut later this year, and Williams said he has no policy bias either way right now.

“The policy is in the right place,” he said. “I don’t see any reason to have a bias up or downward in the current circumstances. We’re going to evaluate, assess, to see the best decision to get us to our goals .”

Williams also said tariffs act like a negative supply shock and have already had an effect on U.S. inflation.

“It has various effects on the economy,” he said. “It probably will boost inflation by a few tenths over the next year. It affects demand a bit and growth in the short run. But also its negative effects on the chains and how our economic system works.”

Williams also said:

• “If there were a further escalation in terms of tariffs those effects would get even larger. This starts to affect consumer prices as these tariffs are applied more broadly. The consumer sees it in prices paid in stores. That’s a significant effect”
• On the lower bound: “Now that we’re in a more normal economy, those concerns are still in the back of my mind, but in the current situation, the focus has got to be on keeping the expansion going and also getting inflation right on our 2% goal”
• On world growth: “China’s growth has come in better, in part because of policy actions. Europe is still a mixed picture, we’ve seen some weakness in Japan. On the global growth side, there are some downside risks. One thing we don’t want to lose track of is the U.S. is still steaming ahead through this”

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