New York Federal Reserve President John Williams said on Monday that US monetary policy was “well positioned” to deal with the high level of economic uncertainty created by the war in the Middle East, as he expected that once current inflation subsides, the central bank could turn its attention back to lower rates. “The future is difficult to see, and the risks to both sides of our mandate have increased,” Williams said in a speech before a gathering organized by the Cynosure Group in New York City. “The extent and duration of the effects of supply disruptions and higher energy prices arising from the Middle East conflict are key factors that will shape the global economic outlook,” he said.

Williams noted that high inflation, mixed job market signals and uncertainty about the war present an “unusual set of circumstances” for Fed policymakers. Williams told reporters after his remarks that when it comes to the future of monetary policy, “With all the uncertainty today, I don’t think we’re in a position to provide strong guidance on where interest rates are likely to be in the next few meetings.” But he also said “I don’t see anything in the data today” that suggests a need for a rate hike “in the near term.”

He said he expects resilient economic growth of between 2% and 2.25% this year, amid largely stable job market conditions, with unemployment holding between 4.25% and 4.50%.

But inflation, challenged by tariffs and energy costs, will hover around 3% this year before returning to the Fed’s 2% target, Williams said. He added that inflation expectations were also largely stable while warning that energy price increases could be worse than expected.

“Market expectations of the future path of oil prices are fairly benign, but some plausible scenarios include more severe disruptions in both prices and quantities,” Williams said. He added that an Iran war could “result in a large and broad-based supply shock that has more serious adverse consequences for inflation and economic activity.”

Uncertain outlook

Williams’ comments were his first public comments since the US central bank decided to keep interest rates unchanged last week. Fed policymakers remain in wait-and-see mode with monetary policy as they face significant uncertainty about the economic outlook due to the war.

That conflict, particularly the closure of the vital Strait of Hormuz waterway, has sharply increased energy prices. Fed officials are grappling with rising inflationary pressures and the prospect that rising energy prices will also dampen demand and pose risks to the job market. Three regional Fed bank presidents supported the central bank’s rate decision last week while objecting to the continued inclusion of language in the monetary policy statement suggesting the next step would be to cut borrowing costs.

Those three officials — the presidents of the Cleveland, Dallas and Minneapolis Fed banks — argued in the wake of the Fed meeting that both monetary easing and tightening were possible. Williams said in his remarks that in times of uncertainty and change, it is natural to see greater disagreement among policymakers. But he added that despite all the dissenting votes against the Fed last week maintaining an easy bias, “I would say there was more agreement today on where policy is” than the vote suggests. Williams told reporters he fully supported the Fed’s policy language and noted that the statement’s outlook for interest rates was “a broad kind of contour of where interest rates are today compared to where I expect them to be.” The Fed “will need to cut rates at some point in the future” as price pressures return to target, he said. In other comments, Williams declined to address the question of whether or not the central bank would expand its currency swap lines beyond current counterparts.