In light of the combined effects of uncertainty and the White House’s announced tariff increases, New York Fed President John Williams stated on Friday that the unemployment rate may grow from its current level of 4.2% to between 4.5% and 5% over the course of the next year.
Although it is difficult to predict exactly how the economy will develop, Williams said that “the broad contours of the outlook” for this year are starting to take shape after President Donald Trump declared he would raise tariff rates to their highest level in a century.
Williams’ prediction included the potential for the rise in unemployment to violate the Sahm rule, even though he made no mention of a recession.
Former Fed worker Claudia Sahm pointed out a statistical regularity that indicates a recession and a higher increase in the unemployment rate usually follow an increase in unemployment of 50 basis points or more, though this is not a hard-and-fast rule.
According to Williams, real GDP growth will likely drop to less than 1%.
He predicted that this year’s inflation will rise to between 3.5% and 4% as a result of the higher tariffs. That is significantly higher than the Fed’s 2% objective.
Despite acknowledging the possibility of slower-than-expected growth, Fed speakers this week have emphasized that they are more concerned about inflation than growth.
The forecast for 2026 is uncertain, according to Williams, a key supporter of Fed Chairman Jerome Powell.
The degree to which this year’s increased inflation carries over into future years and how it can impact the public’s inflation expectations is a crucial topic.
How the world economy will react to the shift in trade policies is another mystery.
Since December, the Fed’s benchmark interest rate has remained stable within the range of 4.25 to 4.5%.
According to Williams, this was the ideal location for rates.
“The current modestly restrictive stance of monetary policy is entirely appropriate given the solid labor market and inflation still above our 2% goal,” he stated.
He noted that the Fed can evaluate the incoming data and adapt to evolving conditions.
