New York Federal Reserve President John Williams now says inflation has likely peaked and that monetary policy is “well positioned” to bring inflation back toward the Fed’s 2% objective. Williams acknowledged inflation remains “unquestionably too high,” but argued that the worst of the tariff effects have passed, housing inflation is moderating, oil prices have peaked, and disruptions tied to the Middle East conflict should ease over time. He forecasts inflation falling to roughly 3.25% by the end of the year and gradually returning to 2% by 2028.
This is precisely where central bankers always get it wrong. They continue assuming the geopolitical landscape will cooperate with their economic forecasts. There is absolutely no evidence supporting that assumption. If anything, the evidence points in exactly the opposite direction. The Middle East is becoming more unstable, not less. Ukraine remains a war of attrition consuming enormous military resources every day. Europe is dramatically expanding defense spending. China is eyeing Taiwan and waiting for the US to stretch itself too thin to protect it. NATO members are rebuilding their militaries at levels not seen in decades. Governments everywhere are preparing for a world of prolonged geopolitical confrontation.
Wars are the most inflationary events imaginable.
Williams argues that oil prices have peaked and that disruptions in the Middle East should gradually subside. That is an assumption, not a forecast supported by events. The ceasefire that briefly lowered energy prices has already broken down. Shipping risks remain elevated. Iran, Israel, Lebanon, Syria, and the Red Sea continue presenting risks capable of sending commodity prices sharply higher overnight. It only takes one escalation to completely invalidate months of inflation projections.
Hellbound and Down 