New York Fed President John Williams said the war between the U.S. and Iran is already feeding into higher prices and weaker economic activity through energy and supply-chain disruption, reviving market concern over stagflation. Based on current pricing, investors expect the Federal Reserve to keep rates unchanged at its April 28-29 meeting and no longer see a rate cut in 2026.
War shock reaches inflation and growth at the same time
Speaking to bankers on Thursday, Williams said the conflict has begun to show up in both rising prices and slower growth, while uncertainty around the national and local economic outlook has climbed sharply. He said energy prices could fall if supply disruptions ease quickly, with some of the damage reversing later this year. That was only part of the message.
Williams also warned that the conflict could create a much larger supply shock, lifting inflation through higher intermediate costs and commodity prices while restraining economic activity. He said that process has already started. This is the setup economists describe as stagflation: weak growth combined with elevated inflation, a mix that leaves central bankers facing a harder trade-off between price stability and employment.
Supply-chain stress hits highest level since early 2023
Williams pointed in particular to worsening disruption in energy and related-product supply chains. According to the New York Fed's global supply chain pressure index, the degree of strain in March reached its highest level since early 2023. The impact of higher energy costs is spreading beyond fuel, he said, into airline tickets, groceries, fertilizer, and other consumer goods.
Even so, Williams said he still broadly expects the economy to keep expanding and inflation to cool over the course of the year. At the same time, he acknowledged that the Fed's dual mandate of stable prices and low unemployment is being challenged from both sides.
Markets now see no cuts this year
As a permanent voter on the Federal Open Market Committee, Williams said current monetary policy is in a good position to balance the risks around maximum employment and price stability. The FOMC held its benchmark rate at 3.5% to 3.75% in March. Market pricing now implies another hold at the next meeting, with expectations shifting toward no rate cuts at all this year.
For his baseline outlook, Williams said U.S. real GDP growth should remain at 2% to 2.5% this year, while inflation is expected to come in at 2.75% to 3% before returning to the Fed's 2% target in 2027. He added that longer-term inflation expectations remain well anchored for now.