Federal Reserve's Williams: It's too early to assess the impact of the Iran war on the U.S. economy

Investing.com - New York Federal Reserve Chairman John Williams said Tuesday that it is too early to determine how a war with Iran will affect U.S. inflation and economic growth, but the U.S. economy is less dependent on imported oil than in the past and has shown resilience to energy price shocks.

Williams told reporters after a conference hosted by the U.S. Credit Union Association in Washington that the transmission of economic impacts from the conflict will mainly occur through asset prices and financial market reactions, which have been relatively mild so far.

“No one can determine how long this will last or what broader effects it may have,” Williams said. “Past experience shows that the oil price fluctuations we’ve seen so far are unlikely to fundamentally change the economy, but we will wait and see.”

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The Fed official pointed out that the impact of the Iran conflict will be transmitted through oil prices, financial market conditions, and asset prices. He added that increased uncertainty could also have effects.

Williams emphasized that the U.S. economy’s dependence on imported oil is not as high as it was 50 years ago, and oil price fluctuations are unlikely to fundamentally alter the economy. However, he acknowledged that oil prices do influence inflation, and this will affect the near-term inflation outlook. The Fed must assess the persistence of any price changes.

The New York Fed president said it is still too early to make a broader assessment of how the Iran conflict will impact the global economy. He noted that the Fed needs to consider spillover effects on foreign markets and trading partners, but it’s too soon to draw conclusions.

Williams stated that the Iran conflict could potentially impact both sides of the Fed’s dual mandate, but the key is the extent of its influence on each. He added that the risk of inflation remaining above target and altering inflation expectations does exist, although this has not happened so far.

He said it’s difficult to compare the Iran conflict with Russia’s invasion of Ukraine because the persistence of oil price shocks remains uncertain.

On other topics, Williams said he does not believe recent adjustments in the private credit sector pose a fundamental threat. The Fed is monitoring the trend of loans shifting outside the regulated sector, but he has not yet considered it a stability risk.

Williams stated that research on tariffs has been consistent across studies and is very important for the Fed’s understanding of the issue. He defended the Fed’s research, saying it is not part of a political or partisan agenda and is crucial for the Fed’s independence in setting monetary policy.

The Fed official pointed out that long-term inflation expectations have remained very stable. He said the primary reason for rate cuts would be to maintain a steady real interest rate when inflation declines, and second, to consider whether policy needs to move closer to neutral. Williams still believes the Fed’s policy rate is slightly above the neutral level.

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