Global central banks, take note! "Third in Command" of the US Fed: We Must Do Our Utmost to Avoid Highly Persistent Inflation

John Williams, president of the Federal Reserve Bank of New York, said on Wednesday that when inflation begins to deviate from its target, central banks must "respond relatively strongly" to avoid inflation becoming highly persistent.

He said that given the significant uncertainty surrounding the impact of US tariff and trade policies on the economy, central banks should focus on avoiding measures where "the cost of error far exceeds the benefits," rather than seeking perfect solutions.

As the president of the Federal Reserve Bank of New York, Williams also serves as the vice chair of the Federal Open Market Committee (FOMC), holding a permanent voting right like the Fed's governors, and is regarded as the "third-in-command" at the Fed. In terms of monetary policy, his influence is second only to that of Chair Powell.

At a meeting held by the Bank of Japan in Tokyo, Williams, in conversation with Ryozo Himino, deputy governor of the Bank of Japan, stated that one of the high risks central banks must avoid is allowing inflation expectations to deviate from their targets.

"You should avoid inflation becoming highly persistent, as it could become permanent. When inflation begins to deviate from the central bank's target, the way to achieve this is to respond relatively strongly," he said.

Williams stated that as long as inflation expectations remain stable, shocks typically do not have a long-term impact on inflation. However, he warned that there is always uncertainty about how supply-side shocks, such as those caused by the COVID-19 pandemic, might affect the public's perception of future price movements.

"Uncertainty has risen significantly. We must be very clear that inflation expectations could shift in any potentially harmful way," he added.

Williams said that given these uncertainties, central banks should not only strive to stabilize long-term inflation expectations but also ensure that short-term expectations "perform well," so that the public's perception of future price movements returns to the central bank's target "within a few years."

Since the US Fed cut interest rates by 100 basis points in the second half of last year, it has maintained the target range for the federal funds rate at 4.25%-4.5%. However, US President Trump's "comprehensive and erratic" tariff policies have complicated the task of central bank officials in controlling inflationary pressures.

Nevertheless, according to Williams, although global financial markets experienced "significant shocks" and volatility in April following Trump's announcement of "reciprocal tariffs," there was no "disintegration."

"One thing you definitely saw in April was a lot of movement between buyers and sellers, which is a sign of the market functioning," he added.

Williams also said that, based on many indicators monitored by the Federal Reserve Bank of New York, the level of reserves in the US is "clearly adequate" to cushion against unforeseen shocks.

"It's great to have a cushion to absorb market impacts when you encounter significant shocks and see unexpected ones," he added.