New York Fed President John Williams highlighted the difficult inflation backdrop again today, warning that the Fed cannot ignore persistent supply shocks as it tries to bring inflation sustainably back to its 2% target.
Williams said that the labor market is not currently a source of inflationary pressure and argued that tariffs generally do not create sustained inflation on their own. The bigger concern is that repeated supply shocks can keep pushing prices higher and make it harder for inflation to return to target.
This has been a recurring theme in his recent comments. Over the past year, he has pointed to tariffs, higher energy and commodity prices, and supply-chain disruptions linked to the Middle East conflict as important drivers of elevated inflation. He has also highlighted stronger demand for some goods and electricity related to the AI investment boom as another area where demand has temporarily been running ahead of supply.
The important distinction is between a one-off price increase and a persistent inflation problem. A tariff or an oil-price shock can raise the price level without necessarily creating an ongoing inflationary spiral. But the Fed still needs to make sure these shocks do not become entrenched through broader price-setting behaviour or inflation expectations.
Since 2025, the US economy has been hit by a succession of supply-side shocks rather than one isolated event. Tariffs pushed up imported goods prices, while the Middle East conflict created another wave of energy and commodity price pressures. Williams has previously noted that these effects have stalled progress toward the Fed’s 2% inflation goal.
The Fed cannot directly produce more oil, remove tariffs or repair disrupted supply chains with interest rates. But it can prevent those shocks from turning into a broader and more persistent inflation process by keeping monetary policy sufficiently restrictive.
The issue isn’t that every supply shock should trigger an immediate rate hike. Rather, the Fed needs to assess whether the shocks would fade or whether they are becoming persistent enough to prevent inflation from returning to 2%.
Looking ahead, markets will continue to focus on US-Iran developments as a breakthrough would send oil prices lower, easing inflation concerns. A prolonged stalemate, on the other hand, would keep crude oil supported, forcing the Fed to maintain a hawkish stance.
This article was written by Giuseppe Dellamotta at investinglive.com.