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President Williams, thank you so much for sitting down with me. It's great to see you.

And welcome to the New York Fed.

Thank you so much for having me. Uh, the president set to announce reciprocal tariffs on Wednesday, though it appears there may be a multitude of other options on the table again, including blanketed tariffs. This of course, on top of 25% tariffs that have been announced on all cars and car port parts that are being imported into this country, 25% tariffs on aluminum and steel, tariffs on China, and 25% tariffs on Canada and Mexico that get kept back in. So how are you thinking about the impact of all of these tariffs?

Well, clearly, we have our, you know, economists studying these issues. We've looked back at the history of where tariffs have been imposed in the past and looked at what we've seen in the effects in terms of prices for those, in terms of the effects on economic activity. So we've been looking at a lot of that analysis and trying to understand what those potential effects could be. Now, it's still early days as you're mentioning. We're still awaiting more news about what tariffs will be implemented, what the timeline is for that, and other actions around that. So I just highlight, there's a lot of uncertainty, but really looking carefully, I think we'll be from my point of view looking carefully at what actually, you know, is implemented, what other countries may do, but also watching the data. And I think this is the most important part. It's one thing to have models that say, you know, tariffs clearly increase prices in the US. That's, that's, I think you know, pretty convincing evidence of that in the past that affects decisions that businesses make. But we really want to watch the data, especially the data on prices and and activities in the affected industries. So that's something we've been watching already and continue to look at as, as, as time goes on.

Fed chair Powell has said that his base case scenario is that any inflation from tariffs could prove transitory, but we've heard from some of your colleagues at the Boston Fed and the St. Louis Fed who are worried about potential long-lasting effects for inflation. Uh, St. Louis Fed President Alberto Mussalam brought up the notion of domestic producers increasing prices in concert with importers. We also know that we're going to see tariffs on intermediate goods that could ripple through the supply chain. So how are you thinking about the potential for prolonged effects when it comes to inflation and tariffs?

Well, you've highlighted a number of channels where you could get more prolonged effects. So the example that you gave about intermediate inputs, those, you know, increase costs for American producers. It takes some time for those to get into consumer prices and and show up in inflation. So it's definitely a channel that past history teaches us may take a few years to be fully uh, uh, kind of, you know, seen in the data. Uh, but there's other, you know, questions out there or, or how does it spill over to other goods and services in the economy? So I would say it's still early days and and to be able to come to a concrete, you know, concrete conclusion around this. I think one is, yes, we will see tariffs affect prices, and then we'll just have to keep watching how do those cascade into prices, you know, downstream to other goods in the economy. What do we see the effects on on kind of other goods being produced in the US and and really have an open mind about how long these last in terms of their effects on inflation and on the economy.

You said it could take a couple of years for this to filter through. So do you think this is going to be slow moving or some people have said it could be fast moving?

Well, I think it, it will be both. Uh, so I think the answer to a lot of your questions is really yes, because I think all of these things will happen. One is on consumer goods. I think the history there is, you see pretty strong pass through that happens pretty quickly. Uh, but it still might, you know, depending on the market, you know, businesses might take their time in changing their prices, so that may take a matter of months or so. It's really in these intermediate inputs or maybe indirect effects that I think that the effects might not be felt uh, maybe for a couple years uh, fully felt. So I think we have to watch kind of all these channels. So the way I view it is we need to be really looking at the granular data and understanding what has happening direct effects on, on tariffs on prices, but also some of the indirect effects that might filter through the broader economy.

Looking at the latest inflation data, uh, your preferred inflation index core PCE jumped up to 2.8% in February. Uh, it's already at the increased median forecast for inflation this year for Fed, for the Fed officials. Um, and this is before we've seen some of the most aggressive slate of tariffs really kick in. So how much upside risk is there to your inflation forecast? Could we be looking at inflation potentially over 3% this year given that we're already at 2.8?

So I think that there's definitely a risk to inflation being higher than is in the forecast. Of course, if you look at the projections that my colleagues and I, you know, uh, put together for the last FOMC meeting, uh, you saw a very broad uh, view across the participants of the committee that there, there were upside risks uh, to the inflation outlook there. So I think that that's completely consistent with how I personally view it. I think that my base, you know, my forecast if you will, is that inflation will be relatively stable perhaps this year, but definitely there's upside risks depending a lot on these uh, on the tariffs and and other policy, policies that may take place.

Is the potential for higher inflation greater in the near term than the risks to growth and employment?

Oh, that's a, that's a hard question. I think again, going back to the projections that we put out, I mean my, you know, look there, uh, you see upside risk to inflation that I mentioned, but also predominantly downside risk to the risk to the economic outlook. I think the, the uncertainty is very high. I think that's something that everybody is saying. I know I say, said a lot in, in my recent public remarks, but also I think the uncertainty has shifted somewhat, more concerns about maybe a slowing of growth in the US economy more than before, but also greater uh, near-term uh, risks to inflation. I can't personally weigh, you know, which is greater. I think they're both very important.

On growth, when you look longer term, some economists have chalked up the tariffs to a big tax hike on consumers, saying that could zap consumer spending and ultimately hurt growth. Uh, the president has not ruled out a recession. Treasury Secretary Scott Benson has said we could see an adjustment. We are seeing a lot of houses on Wall Street raise their forecasts for recession. Are the odds for a recession rising?

Well, I, I'm not going to try to make a prediction of the odds of recession. I think that's very hard to do. Clearly, where we are today is an economy that's very solid. We have, you know, labor market that's strong and in good balance. We've seen very good growth up to, up to this point. So I feel like the economy is in, in a very good place. Uh, but I think, you know, uh, what, what people are, I think seeing is that there's a lot of uncertainty about how the economy will, will evolve and a lot of uncertain about, first of all, the policy actions we'll see about that, but also how the, you know, the US economy and I would say importantly, the global economy uh, respond uh, to, to these developments.

To your point, the economy looks like it's on fine footing right now. Uh, if you look at the so-called hard data, the official data, uh, the pace of hiring has slowed a bit in the first couple months of this year. We saw a bit of softness in the retail sales numbers. Of course, that could be chalked up to colder weather, but you look at the consumer sentiment surveys, and those have plunged. So my question is, is the soft data leading the hard data? I mean, you look at the capex numbers, right?

So this is always a question that we ask ourselves, you know, for as long as I can remember. And you know, we do want to see real data on consumer spending unemployment. We'll get that data, you know, we'll get more real kind of hard data on the economy. That is really important. Let's see what actually's happening rather than maybe how people respond to surveys. That said, I'm not totally discounting what I'm hearing from surveys and from business contacts that I talk to. Definitely uncertainty is high on people's minds. People are uh, you know, talking a lot about it. I think this shows up in surveys of households and businesses that they're not quite sure how these policies are going to kind of play out and maybe, you know, taking some time to assess what's happening and make some wait, wait, put off maybe some decisions that they might have made earlier. So I think that the uncertainty itself, regardless of what the policies are, probably is affecting uh, you know, some household and business behavior. And of course, the tariffs itself, as you mentioned, that will affect businesses decisions uh, as well.

With the policies being laid out by the administration and given your outlook for higher inflation and lower growth, are we basically facing stagflation? And if not at this point, are you growing concerned that that could take root? And can you assure Americans that you won't allow a 1970s situation take root when it comes to inflation?

So let me start with your last question. Yes, I can assure Americans that we will not allow high inflation to take root like we saw in the 70s and 80s. You know, and I think about my whole career, that's over 30 years now in the Federal Reserve, it's, you know, really important focus is to make sure that we don't have to relive anything like we experienced in the 70s and 80s. And that's part of the reason, of course, that, you know, Chair Powell and the FOMC have uh, been absolutely committed to bringing inflation back down uh, as quickly as possible to our 2% goal. And that's what we're, you know, very much committed to to achieving uh, now. Now, that said, as you pointed out, you know, some of the risks are uh, out there in terms of achieving our goals. Uh, are um, obviously, something we'll be very uh, closely watching and trying to make sure that we achieve that 2% inflation goal over time and do it in a way that is very attentive to our maximum employment goals. So our communication out of the FOMC meeting and, you know, in my communication and the chair's communication is really focused that we have two goals. We're very focused and committed to achieving both of them and absolutely making sure that higher inflation doesn't take root.

So, but stagflation now or no?

It's not stagflation now. I mean, right now, we're in a situation of 4.1% unemployment rate, two and a half percent inflation rate. Uh, you know, my, my focus is trying to, you know, maintain that kind of economy as best as we can, again in the context of ensuring that we get inflation uh, back down to 2% sustained basis.

You said in a speech recently that you expect lower immigration and that could constrain workers, the increase in workers, I should say, in the job market, putting a damper on growth. I'm wondering, you've also talked to your contacts who've talked about uncertainty, perhaps putting hiring plans on hold. Given all of that, your outlook for lower immigration, the federal job cuts that we're seeing, as well as the potential for any impact from tariffs, how much of a deterioration could we see in the job market?

Well, you know, that, that's a hard question to answer because you're talking about both supply and demand factors of a complex set of issues. My own view is the economy will continue to grow, but somewhat slower than we saw last year. We've seen some slowing already in the data, but still, we're, it's in a, it's in the context of an economy that's growing and a rel, and a pretty low unemployment rate. Um, so, you know, when I think about this, we have to as, as, you know, policy makers, we have to look at all the influences on the economy, both domestic internationally and, and these uh, other uh, you know, policy things that you're mentioning and, you know, basically try to assess, how do we best achieve maximum employment, price stability, and what's, you know, stance of monetary policy that will maximize our chances of getting there. Right now, this is, you know, an economy that has, has been making a really remarkable progress towards achieving our goals. Uh, we have monetary policy really well positioned uh, to navigate a time of heightened uncertainty and then uh, and take whatever, you know, is appropriate actions to make sure that we achieve those goals.

If I could characterize our interview so far, I think the buzzword is uncertainty. Um, we know that there are inflation risks to the upside. Given these factors, do you anticipate that you could hold rates at current levels for longer?

Right.

I think that the current level of the federal funds rate, you know, the target range the FOMC sets is, is really well positioned. I feel like monetary policy is moderately restrictive. It is putting some downward pressure on inflation, and I feel that keeping that stance for some time, I, you know, we'll, we'll be data dependent, driven by the data, the evolution of the economic outlook, and also the risk to achieving our goals. We'll always be data dependent. But right now, I think it, it is very well positioned. Uh, the economy is doing uh, you know, like I said, reasonably well, a good, a solid labor market. And so we have the ability to collect more information, more hard data to complement the soft data we were talking about and and and really make sure we got a clear picture of what's going on. So I, I do feel that monetary policy is, is in a, in a good place.

You said you're looking to hold rates for quote, sometime. Given that we could see multiple rounds of this terror of tariffs, maybe if there's retaliation or negotiations, also creating more uncertainty about the path forward for the economy and I'm sure monetary policy, do you foresee potentially holding rates steady through at least the spring or even into the summer months?

Well, you're asking me to predict the future. And I think as I said, you know, the situation is uncertain. We, we need to uh, follow what, what, what we're learning from uh, from the data, from all the information we collect. But again, like right now where we are today, uh, I do think that we've got monitor policy, monitor policy well positioned to navigate, you know, various scenarios, but we'll have to just keep watching how things evolve and just stay focused on achieving maximum employment and price stability.

Does fewer than two cuts seem increasingly likely?

Well, that's getting, you're getting me out to all the way till through the end of the year. Yeah. And it's, it's, you know, we put out our projections. These are uh, you know, participants, you know, serious efforts to think through of things that can happen. I would highlight that for me personally, the point estimate is not the thing that that I'm so focused on. I don't know what exactly's going to happen over the next nine months or where the monitor policy needs to be in next nine months. Much more focused on making sure that we have our policy well positioned to manage any circumstance that comes our way and, and we're, we're ready to uh, you know, shift policy if it's appropriate to achieve our goals.

I'm trying here.

What you did say later in the year, I heard that, right?

To later in the year, what?

In terms of the cuts.

I didn't say anything about later in the year in terms of cuts. I just continue to assess uh, as we get more information.

Let me ask you this, President Williams. Uh, if long-term inflation expectations were to become unanchored, would that be the trigger to raise rates or would rate hikes be on the table ahead of that because if you got to that point, it may be too late.

Well, you know, my view is we need to keep longer run inflation expectations well anchored. This is the thing that has really helped us and more importantly, the US economy over the past five years. We went through these enormous uh, shocks to our economy through Covid, through Russia's invasion, Ukraine, everything that's happened over the past five years, and longer run inflation expectations remained anchored. So it is our job to make sure that that continues to be the case both through our words and our actions. So that to me is absolutely critically important, so that we aren't asking the question, well, now that inflation expectations, you know, are becoming unmoored, what do you do? We just need to make sure that we keep them well anchored as they are today.

There's a lack of clarity on why the Fed decided to slow down the balance sheet run off now. So why now? Was it in anticipation of hitting the debt ceiling? Was it uh, perhaps trying to avoid a repeat of 2019 where there was dislocations in the money markets given volatility that we're seeing now in the markets, why now?

Well, you know, we set out back in 2022, the FOMC set out a strategy, set of plans uh, to uh, bring down our balance sheet and and get to a point of what we call ample reserves, a system of a level of reserves uh, that can support interest rate control. And so that's what we set out to do in 2022. We have been executing that uh, that plan uh, very well. We've reduced the size of our holdings by over $2 trillion uh, during that period, and it's gone very smoothly. Now, we did say in our plans that over the course of this process, we would slow the speed of the reduction of our balance sheet, kind of, you know, just be take as a prudent step to make sure that we didn't run into any, you know, bumps along the way. We did that once before. We cut the speed roughly in half of the shrinkage of the, of the balance sheet. We just cut it by roughly a half in terms of the actual reductions in our balance sheet. So this to me was a natural next step in a process that's going extremely well. Uh, making sure that, you know, as we get closer and closer to maybe this ample reserves or somewhat above ample reserves level that we're, we're aiming for, that, that we're coming in at a slower speed and we can collect data, understand what's going on, and uh, and avoid any, you know, unnecessary uh, bumps along the way. So to me, it's just a statement of carrying out our executing on the plans we set a few years ago and doing that in a way that minimizes any disruption uh, in markets.

President Williams, we'll have to leave the conversation there, but thank you so much for your insights. So appreciate it.

Thank you.