After Powell Was Sued, Federal Reserve's Third-in-Command Speaks Out: The Fed Is Not Under Strong Pressure to Change Interest Rates

After Powell was sued, New York Fed President John Williams gave a speech on Monday, defending Powell and making it clear that the current monetary policy stance is robust and there is no need to adjust interest rates in the short term.

On Monday,Williams stated in a speech at the Council on Foreign Relations in New York that the current monetary policy can strongly support the stability of the labor market and bring the inflation rate back to the long-term target of 2%.

He is optimistic about the economic outlook for 2026, expecting GDP growth of 2.5% to 2.75% and a stable unemployment rate. Williams expects inflation to peak at 2.75% to 3% in the first half of this year, 2.5% for the full year, and fall back to the 2% target by 2027.

These statements come at a time when the independence of the Federal Reserve is under attack. On Sunday night, Powell announced that the central bank had received a subpoena over cost overruns in its headquarters renovation project, but he believes these legal actions are just an "excuse," and the real purpose is to influence the Fed's interest rate decisions through political pressure or intimidation.

Williams stated that although he could not comment on any legal investigations involving the central bank and its officials, he warned against undermining the independence of the central bank. He said:

Attacks on central bank independence often lead to very unfortunate economic consequences, including high inflation.

Clear Monetary Policy Stance, No Urgency for Rate Cuts

In his speech, Williams pointed out that the FOMC has "adjusted the moderately restrictive monetary policy stance to a level closer to neutral."

The Fed's third-in-command emphasized that it is crucial to bring inflation back to the 2% target "without imposing unnecessary risks on the job market."He added:

In recent months, as the labor market has cooled, downside risks to employment have increased, while upside risks to inflation have eased.

After the Fed lowered its short-term interest rate target by 0.75 percentage points last year, bringing the federal funds rate target range down to 3.5% to 3.75%, it is generally considered to have entered a phase of holding interest rates steady.

At the policy meeting last December, officials anticipated another rate cut this year, provided that the job market remains stable and inflationary pressures ease as the impact of Trump's erratic tariff policies wanes. However, the latest labor market data shows that demand for employment remains weak even as inflation stays elevated.

In a TV interview in December after last month's Fed policy meeting, Williams said he saw no urgent need for another rate cut. Though inflation remains above target, the Fed continues to face pressure from Trump and his allies to cut rates aggressively, and other Fed officials have expressed similar policy views in recent days.

Defending Powell and Warning of Independence Risks

In response to the "attack" on the Fed's independence, Williams warned against undermining central bank independence. Williams made it clear:

Powell has proven himself to be a person of impeccable integrity, leading the Federal Reserve through challenging times.

This statement is a strong show of support for Powell. In his written and video statements issued Sunday night, Powell said the investigation was ostensibly related to issues regarding the Fed headquarters renovation mentioned in his June congressional testimony, but the real intention was to influence the Fed's rate decisions through political pressure.

While some have worried that the issue would cause significant turmoil in the financial markets, so far the impact has not been as severe as expected.Williams attributed the relatively calm market response to the uncertainty over how the political and legal disputes will be resolved.Williams told reporters after the speech:

The market is responding to what is happening and changing its views as events unfold.

He believes that the market volatility so far has remained moderate, and said "there is no certainty about how this will end," which has limited large swings in asset levels.