What is driving US inflation, according to New York Fed's Williams?

Solid Underlying Economic Momentum

The US economy demonstrates solid underlying momentum, showing signs of strengthening despite significant shocks and elevated uncertainty, according to remarks delivered by John C Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, on 29 September 2026.

Real gross domestic product (GDP) expanded by about 2% over the last year, with productivity growth surpassing pre-pandemic levels. Business investment has seen a surge, largely powered by the ongoing expansion of artificial intelligence (AI) infrastructure.

This sustained growth and high productivity have contributed to gains in the stock market, which in turn has supported healthy consumer spending, particularly among higher-income households and property owners. Mr Williams noted that while demand remains healthy, fundamental factors suggest a trend growth rate of approximately 2% for the economy.

Strengthening Labour Market Conditions

The US labour market continues to be strong, showing marginal improvements, Mr Williams noted in his 29 September 2026 address. Several indicators support this assessment: the unemployment rate has decreased to levels observed in the first half of 2025, and layoff rates nationwide are near historically low figures.

Payroll employment has consistently shown positive gains, and survey data on job and worker availability have improved. Regionally, the New York Fed's business surveys for the Second District indicate that manufacturing sector employment is increasing at a solid pace, while the services sector maintains steady employment levels. These conditions align with the Federal Reserve's mandate to achieve maximum employment.

Persistent Inflationary Pressures

The primary challenge for the Federal Reserve's dual mandate remains price stability, with inflation at 3.7%—well above the long-term target of 2%, Mr Williams stated on 29 September 2026. Over the past 18 months, inflation has risen by about one percentage point, driven by three main factors.

Initially, higher tariffs on imported goods contributed to price increases, though Mr Williams observed that these tariffs are no longer adding to goods price inflation. However, the other two drivers persist: supply-chain disruptions, alongside elevated energy and commodity prices stemming from conflicts in the Middle East and elsewhere, continue to exert upward pressure.

Additionally, strong demand in specific goods and services categories, linked to the surge in AI-related investments, also contributes to the elevated inflation rate.

Implications for Asia's Economy

The Federal Reserve Bank of New York's assessment of US economic conditions carries significant implications for Asian markets and companies.

The continued strength in US consumer spending and business investment, particularly in AI, could drive demand for Asian-manufactured goods and technology components, offering export opportunities for economies like South Korea, Taiwan, and Vietnam.

However, persistent global inflationary drivers, such as elevated energy prices due to Middle East conflicts and refining capacity constraints, will affect energy-importing Asian nations, potentially increasing operational costs for industries and impacting trade balances.

While US tariffs are currently not adding to goods inflation, any future imposition of new tariffs, as noted by Mr Williams, would directly affect Asian exporters and global supply chains.

Asian policymakers will monitor the Federal Reserve's future monetary policy decisions, with the next Federal Open Market Committee meeting scheduled for 18 December 2026, as US interest rates influence capital flows and currency stability across the region.