Whether to cut interest rates or not, the US Fed is in an uproar! The "third-in-command" supports the "wait-and-see" faction: Tariffs are expected to drive up inflation

John Williams, the New York Fed President and the US Fed's "third in command," projected on Tuesday that US economic growth would slow down this year while inflation would rise, largely due to tariffs. Williams' remarks suggested he was in no hurry to cut interest rates.

"I expect uncertainty and tariffs to restrain spending, while reduced immigration will slow labor force growth," Williams said ahead of an event.

He stated that he anticipated US economic growth to slow significantly to around 1% this year, with the unemployment rate rising from the current 4.2% to 4.5% by the end of 2025.

He also projected inflation to climb to 3%, then take two years to gradually pull back to the 2% target.

Williams added that tariffs have clearly impacted the economy so far, moderately boosting inflation. He noted that more importantly, their effects are far from over, "I expect the impact to be greater, not smaller, in the coming months."

He said, "Interest rates will eventually need to return to more normal levels," and "in the coming months," Fed officials will obtain data to help guide their next monetary policy decisions.

This was Williams' first speech since last week's Federal Open Market Committee (FOMC) meeting. On Wednesday, the US Fed kept rates unchanged at 4.25%-4.5% amid heightened uncertainty from Trump's trade policies.

Deep Divisions Within the US Fed

In recent days, Fed officials have intensively shared views on the rate outlook, exposing stark internal divisions. The "rate-cut camp," led by Waller and Bowman, argues that given cooling inflation and tariffs' limited impact, rates should be cut as early as July. Meanwhile, the "wait-and-see camp," headed by Fed Chairman Powell, advocates holding steady while monitoring tariffs' inflationary effects.

On Tuesday alone, at least five Fed officials spoke, mostly siding with the "wait-and-see" approach.

Fed Chairman Powell testified before Congress that tariffs would significantly affect inflation soon but urged patience before acting.

Cleveland Fed President Mester noted substantial uncertainty about tariffs' inflationary impact, making rate cuts premature; Fed Governor Barr projected Trump's tariffs would push prices higher, warranting continued observation; Atlanta Fed President Bostic said businesses plan price hikes later this year due to higher import tariffs, and with stable employment, the Fed need not rush to cut rates.