NEW YORK (Reuters) -New York Federal Reserve President John Williams said on Thursday a gradual lowering in short-term borrowing costs is warranted over time if the economy meets his current forecast of modest gains in unemployment and a softening of inflation trends next year.

The current setting of monetary policy at "modestly restrictive" levels that are "appropriate" given the current state of the economy, Williams said in the text of a speech to be delivered before a gathering of the Economic Club of New York.

But looking forward, "if progress on our dual-mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time," Williams said.

He noted the Fed faces a balancing act to ensure that President Donald Trump's tariffs don't fuel a longer-run breakout in inflation pressures while at the same time ensuring rates aren't kept so high that they wound the job market.

Williams said growth has moderated due to trade and other policy uncertainties, and the job market has cooled while remaining currently in balance. He said he sees GDP growth at between 1.25% and 1.50% this year, with the unemployment rate, now at 4.2%, rising to 4.5% next year.

The New York Fed chief also said tariffs are having a clear upward impact on inflation and will likely lift price pressures by 1.0% to 1.5% this year. As for overall inflation, he said the Personal Consumption Expenditures Price Index should stand at between 3% and 3.25% this year, before ebbing to 2.5% next year and back to the 2% target in 2027.

"Fortunately, I am not seeing signs of amplification or second-round effects of tariffs on broader inflation trends," Williams said.

POLICY MEETING

Williams is one of the last Fed officials scheduled to speak before the central bank goes into its customary quiet period ahead of the September 16-17 policy meeting. It is broadly expected to cut its benchmark interest rate by a quarter of a percentage point from the current 4.25%-4.50% range, as it seeks to provide some potential support for a softening job market, even as inflation remains high and under pressure from President Donald Trump's trade tariffs.

Fed Chair Jerome Powell appeared to open the door to a rate cut this month in a speech in late August, although a number of other Fed officials have indicated caution over reducing borrowing costs given a still uncertain inflation outlook.

The outlook for a rate cut could be affected by the release on Friday of the U.S. employment report for August. Weakness in July coupled with big downward revisions to prior months rattled markets, and more trouble there would give officials space to cut rates this month.

A healthy jobs report could cloud the need for a cut.

Evercore ISI analysts said in a note this week that, "we think a 25-basis-point cut in September is by now relatively data-point insensitive and it would take a narrative-changing big broad-based upside surprise to seriously threaten it." They added that "the case for a cut is based on the cumulative evolution of the balance of risks to employment (higher) and inflation persistence (slightly lower) over multiple months."