New York Federal Reserve President John Williams stated that tariffs could increase inflation to between 3.5% and 4% this year. He noted that the economy began the year strongly.
Williams forecasts an increase in unemployment to between 4.5% and 5% and expects economic growth to slow to 1% this year. He emphasised the importance of maintaining stable inflation expectations and characterised a modestly restrictive monetary policy as suitable.
Tariffs and Market Uncertainty
Additionally, he remarked that tariffs create substantial uncertainty in the economy. Current market perspectives suggest anticipation of rate cuts.
Williams has laid out a view that adds weight to the opinion that monetary policy might not ease as quickly as some had hoped. With inflation potentially ranging from 3.5% to 4%, in part due to tariff-related pressures, there’s a clear message: the Federal Reserve may hold firm for longer. Any assumption that a softer inflation path is guaranteed now looks questionable.
His projection of unemployment rising to between 4.5% and 5% suggests a measured cooling in the labour market rather than a sharp downturn—more a signal of tightening taking effect than a cause for alarm. It shows an intent to allow the economy to absorb past rate hikes, rather than respond too hastily to early signs of softness.
He characterised monetary settings as “modestly restrictive”—we can interpret this as a hint at patience rather than urgency. It’s not the posture of a central bank ready to turn dovish at the first whisper of slower growth. For us, this should lead to caution when trying to price in swift moves lower in policy rates.
Monetary Policy and Inflation Expectations
There’s also the topic of tariffs increasing uncertainty. That kind of policy moves outside of monetary control, but the inflation effect is real, and can’t be set aside. If markets continue to expect rate cuts, even amid sticky inflation, positioning could become one-sided and fragile.
Paid volatility, in particular, looks sensitive here. If downside surprises in growth do not coincide with relief on inflation, options markets may misprice the shape of the curve. Flattening expectations could unwind abruptly.
We must keep an eye not just on the data themselves, but on how they relate to the Fed’s reaction function. Williams is suggesting that inflation remains the higher priority, and growth trade-offs are tolerable—within limits. That kind of stance tends to support shorter-dated vol over longer risk assets, at least until inflation trends more clearly.
It may be tempting to chase dovish bets, especially after soft job figures or weak consumption data. But if policy is set to remain restrictive—even modestly so—the bar for cuts gets higher. In this setting, relative trades built around short-duration steepeners or gamma overlays make more sense than high-conviction directionals.
The idea that inflation expectations must remain “anchored” is another piece to weigh. If forward indicators begin to shift – whether via breakevens or survey-based measures – options pricing could again move abruptly. Here, it doesn’t help to bet heavily in either direction, but rather to manage skew and premium decay carefully.
There’s no single line to follow here. Instead, we adapt positions with each adjustment in forward policy signals—especially as Fed speakers like Williams provide more qualitative guidance than hard dates or thresholds. That sort of tone is telling. It means watchfulness, not bold conviction, is what’s being rewarded now.
