NY Fed's Williams Warns of Stagflation Risks Amid Iran Conflict

New York Fed President John Williams warned on Thursday that the ongoing conflict in Iran is introducing significant uncertainty into the U.S. economic landscape, specifically citing risks to both price stability and economic growth. Speaking to bankers in his district, Williams noted that while he remains confident in the general trajectory of the economy, the potential for a large supply shock remains a primary concern. Such a scenario could trigger a combination of slow growth and high prices—commonly referred to as stagflation—which presents a difficult challenge for central bank policymakers. Williams noted that a surge in commodity prices and intermediate costs could simultaneously dampen economic activity while driving inflation higher, a dynamic he suggested has already begun to manifest. To support this view, Williams pointed to the Global Supply Chain Pressure Index, which indicated that conditions in March were the most strained since early 2023. He emphasized that elevated energy prices are not limited to fuel but are creating pass-through costs affecting airfares, groceries, and fertilizer. Despite these headwinds, Williams suggested that current monetary policy is well-positioned to manage these risks. The Federal Open Market Committee currently maintains a benchmark rate of 3.5%-3.75%, and markets anticipate the committee will hold rates steady at the upcoming April 28-29 meeting, with no cuts expected this year. Looking ahead, Williams projects real GDP growth between 2% and 2.5% for the current year. He expects inflation to hover between 2.75% and 3% before eventually returning to the Federal Reserve's 2% target by 2027, noting that long-term inflation expectations remain largely in check.