A senior official at the Federal Reserve (Fed) warned that deepening income inequality could become a major risk factor for an economic slowdown.
John Williams, president of the Federal Reserve Bank of New York, said in a Financial Times (FT) interview on the 9th that "there is considerable evidence that low-income and middle-income household are facing economic hardship," adding, "With high living costs and housing costs, many households are living paycheck to paycheck." He said, "If this imbalance leads to a pullback in consumption, the recovery across the U.S. economy could weaken."
President Williams also serves as vice chair of the Federal Open Market Committee (FOMC), and his remarks came as the Fed weighs whether to cut the benchmark interest rate again in Dec. He said, "The economy still shows resilience, but with inflation above the 2% target and the job market gradually cooling," adding, "the Central Bank is performing a balancing act between economic recovery and price stability."
The U.S. economy is growing more strongly than expected, but the felt economy diverges widely by income group. High earners are enjoying a stock market boom at record highs, while low-income groups have seen their spending power shrink sharply due to soaring rents and prices of daily necessities. President Williams noted, "Consumer confidence could wobble, and the current pace of consumption growth may be less solid than it appears."
Other Fed officials, including Chair Jerome Powell and Governor Christopher Waller, are also focusing on the pace of cooling in the labor market and the imbalance in spending power. Powell said, "High-income groups are leading consumption, and this structure has limits in sustaining the economic expansion."
Political ripples are also being felt. Progressive-leaning candidates who campaigned on easing the cost-of-living burden won the New York mayoral election, while conservative candidates backed by President Trump posted poor results in key governor races. The surge in dwellings prices and the cost-of-living crisis in the United States are being cited as key drivers of the political shift.
President Williams assessed that the recent artificial intelligence (AI) investment boom is supporting U.S. growth, but there are also concerns about a bubble. He said, "The expectation that AI can raise productivity is not an exaggeration," while adding, "If investment overheats, we cannot rule out the possibility that certain corporations could fail or that asset prices could undergo a correction."
He added, "If leverage ratios are not high and equity financing is central, it will not spill over into serious financial instability," and "AI investment should be seen not as overinvestment but as part of a structural shift."
President Williams acknowledged that the Fed's quantitative tightening (QT) policy is putting some pressure on funding markets, but said, "The current level of tightening is reasonable." He said, "Funding expense has risen somewhat recently, but this is a temporary phenomenon that appears during the process of liquidity adjustment."
He also made clear his opposition to a proposal from Dallas Fed President Lorie Logan to link the benchmark interest rate to the overnight funding market (repo market) to reflect actual market rate changes more quickly. President Williams emphasized, "The decision, reached after multiple discussions, to keep the federal funds rate as the policy rate remains valid."
President Williams said, "Widening wealth gaps and the burden of high interest rates could trigger an economic slowdown," adding, "Policymakers should consider inclusive growth as well as price stability."