NY Fed's John Williams warned the Iran war could trigger stagflation-like shock

New York Federal Reserve Bank president John Williams warned this week that the Middle East conflict poses the risk of a large supply shock that could simultaneously raise inflation and dampen economic activity — a combination commonly associated with stagflation.

Speaking at the Federal Home Loan Bank of New York 2026 Member Symposium, Williams said developments in the Middle East are "driving significant increases in energy prices, which are already lifting overall inflation." He added that the conflict has "intensified the uncertainty" around both national and local economic conditions.

"The conflict could also result in a large supply shock with pronounced effects that simultaneously raises inflation, through a surge in intermediate costs and commodity prices, and dampens economic activity," Williams said. "This has begun to play out already."

Williams pointed to mounting disruptions in the supply of energy and related goods. Higher fuel costs are already passing through to airfares, groceries, fertilizer, and other consumer products, he said.

The scenario puts the Fed in an awkward position, pulled in opposite directions by an economy where rising prices and weakening growth demand contradictory responses. Powell has pushed back on the stagflation label when applied to the current U.S. economy, but CNBC noted that Williams' remarks suggest the fear has not been fully put to rest within the Fed.

Despite the risks, Williams said the current stance of monetary policy "is well positioned to balance the risks to our maximum employment and price stability goals." At its March gathering, the FOMC left rates unchanged in the 3.5%–3.75% target range, and another pause is widely anticipated when policymakers convene April 28–29. Williams holds a permanent vote on the committee.

For the full year, Williams penciled in GDP expansion of 2%–2.5%, a temporary inflation overshoot to the 2.75%–3% range, and a return to the 2% price-stability goal by 2027 once energy and tariff pressures dissipate. On the labor market, he put his jobless-rate forecast at 4.25%–4.5%.

Although near-term inflation expectations have climbed since fighting broke out, Williams said gauges covering medium- and longer-run horizons have stayed consistent with the 2% objective. He said the labor market is sending mixed signals, with hard data pointing to stable conditions but softer indicators suggesting continued gradual softening.

Asked about next steps for rates, Williams declined to signal a direction, framing any future decision as contingent on incoming data, the broader economic picture, and how risks evolve.