Federal Reserve Bank of New York President John Williams expressed expectations for a decline in US economic data due to ongoing tariffs. He forecasts inflation to rise between 3.5% to 4% this year, amid significant uncertainty surrounding tariffs and trade.
Williams anticipates economic growth slowing to 1% and the jobless rate increasing to 4.5%-5%. He emphasised a modestly restrictive monetary policy, stating current policies are equipped to handle the situation.
Inflation Expectations
While soft data has deteriorated, hard data remains robust. He asserted inflation expectations are anchored and remains committed to achieving a 2% inflation target.
Williams, speaking in a fairly direct tone, isn’t painting a rosy near-term picture. The forecast of inflation climbing toward 4% ought to be read as a clear warning. It’s not an abstract risk. It’s being actively factored into communications from policymakers. The language here—modestly restrictive, anchored expectations—suggests no immediate pivot towards easing. Monetary policy, by their own admission, already walks the tightrope between supporting growth and curbing inflation.
The projected jobless rate creeping up to between 4.5% and 5% changes the labour market outlook too. It’s not just about headline inflation anymore. When we read “current policies are equipped to handle the situation,” we must consider the implication that rate cuts aren’t part of the immediate response toolkit. Any reversal would require sharper deterioration or a sharp drop in inflation data—not expected right now.
Divergence in Data
Soft data weakening further aligns with the sentiment we’ve noted across recent sentiment and PMI surveys, but there’s a tension between that and the hard data, which, at least on the surface, remains solid. This divergence could result in short-term volatility as traders try to reconcile incoming numbers with policy signals.
The stress on “anchored” inflation expectations tells us something more fundamental—there’s still belief, or perhaps hope, that long-run stability remains intact. But we know how fragile that can be when short-term readings stay elevated. There’s nothing in Williams’ comments implying imminent downside surprises in inflation. In fact, the upper range near 4% suggests policy will likely remain in holding mode longer than previously thought.
From where we sit, these developments increase the likelihood that premium will stay embedded in longer-dated positions, particularly in rates and FX volatility. Compression may prove short-lived, and anyone fading this is likely leaning far forward at a time when data could jar positioning with little notice.
Positioning should reflect this caution—not in fear, but in recognition that policy isn’t about to shift gears. Spreads are worth watching. Term structure may continue flattening if rate hike probabilities are priced out further down the curve, but no dovish tilt is being signalled outright.
So in the coming weeks, as labour data and PCE prints come in, the way data interacts with expectations will be everything. We should avoid leaning into price moves too aggressively when faced with short-lived sentiment swings. As long as policymakers like Williams speak with this tone, the advantage likely remains to those who wait for clearer dislocations rather than chase short-term patterns.
