Fed's Williams Expects Inflation to Ease, Says Fed Will Act If It Doesn't

New York Fed Chief Williams Sees Gradual Decline in Inflation, Signals Readiness to Raise Rates if Needed

Federal Reserve Bank of New York President John Williams said he expects inflation to ease gradually over the coming year and a half but stated that the central bank stands ready to raise interest rates if price pressures fail to moderate as projected.

Speaking in an interview with Reuters on Friday, Williams said that if energy prices and the effects of trade tariffs have reached their peaks and the broader economy continues to expand at a steady pace, the main factors that lifted inflation over the past 18 months would exert less upward pressure. In that scenario, disinflationary trends already visible in the data would likely regain strength, he said.

Williams emphasized his attention to upcoming readings on core inflation. He said he is monitoring whether the data show a pace of price increases consistent with a sustained return to the Fed’s 2 percent target by 2028. “My forecast personally is for inflation to come down in the second half of this year and come down further next year,” he said.

The current setting of monetary policy remains appropriate for returning inflation to target, Williams said. He added that if incoming information shows the economy is not on a path that will bring inflation back to 2 percent, it would be appropriate for the Federal Open Market Committee to adjust policy to restore that trajectory.

The personal consumption expenditures price index, the measure the Fed targets at 2 percent, rose 3.7 percent in the 12 months through June. Inflation has remained above the target for more than five years. At its meeting last week, the FOMC kept the federal funds rate target range unchanged at 3.50 percent to 3.75 percent. Williams said he strongly supported that decision.

Before the meeting, some market participants had speculated that the committee might raise rates given the level and persistence of inflation above target. Three committee members dissented from the decision to hold rates steady. In statements released Friday, the dissenters said they favored an increase in the cost of short-term borrowing to bring inflation down more quickly. Cleveland Fed President Beth Hammack said inflation has remained above 2 percent for more than five years and she is not confident it will return to the target without further policy action.

Yields on longer-term bonds have risen as investors assess the risk that inflation pressures will remain elevated. Futures markets have assigned a meaningful probability to a rate increase by the end of the year.

Williams noted considerable uncertainty in the outlook, particularly regarding the renewal of conflict in the Middle East and its potential effect on energy prices. He said that once the conflict ends and shipping lanes reopen, any upward pressure on prices from that source could subside rapidly. In his baseline outlook, he does not expect continued inflationary effects from the Middle East situation in the second half of the year or in 2027, though he acknowledged that developments could alter that assessment.

Williams said the Fed does not set policy to match prevailing market levels, though it closely monitors financial-market conditions. “We always have to come do our own analysis, do our hard work, assess all of the factors influencing the economy, the outlook,” he said.

The central bank is operating under a new communications approach led by Chairman Kevin Warsh, who has reduced the use of explicit forward guidance about future policy moves. Williams expressed continued optimism about the long-term prospects for artificial intelligence, describing recent fluctuations in asset prices in the sector as typical of periods of rapid technological change. He noted that current leverage levels among businesses investing in AI do not resemble those that contributed to the 2008 financial crisis, citing strong earnings at many of the firms involved and stating that he does not see an immediate financial-stability risk from that borrowing.

Williams said the Fed will continue to evaluate incoming data on inflation, employment, and financial conditions before determining whether additional policy adjustments are required.