New York Fed President John Williams said he still believes one more rate hike this year would be appropriate, but he currently does not expect any increases next year.
Speaking in an interview at the New York Fed on Tuesday, Williams said, "I haven't changed my view. I still think one more hike may be appropriate, and after that, I currently don't expect any further action."
Williams said there are still signs that inflation will slow "substantially" and approach the Fed's 2% target next year as the effects of tariffs and energy price shocks fade. Combined with other signs that core inflation is cooling, he believes this should help offset price pressures from AI infrastructure buildout.
US Treasury yields edged lower on the remarks, with the 2-year yield paring its gain.
Williams's view aligns with the median rate forecast published by Fed officials after their September meeting. The Fed decided to raise rates by 25 basis points at that time. However, several officials, including Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, have made clear they believe more than one additional hike will be needed to bring inflation back to 2%.
Based on fed funds futures pricing, investors currently expect the Fed to hike in December and then raise rates twice more in 2027.
Williams stressed that his outlook is highly uncertain, especially as he continues to closely monitor AI's impact on inflation. He said, "It's only mid-October. The US economy is being affected by many different factors, and we have to keep watching the data."
The latest CPI report is due on Wednesday, the last such report before the October 27-28 meeting.
September Stance Shift
Before the September hike, Williams was not among the policymakers strongly advocating for higher rates. But he said that after two factors changed the near-term inflation outlook, he "strongly supported" the September hike.
First, earlier expectations that the Iran conflict might be resolved and oil prices would fall proved overly optimistic. Second, the spread between crude oil prices and refined product prices widened significantly in recent months. But this did not change his long-term inflation outlook.
Williams said, "I still believe disinflationary forces are at work. We have indeed been affected by tariffs and energy prices, and now there's the AI factor. But I think some of these factors do not indicate that core inflation is rising. In fact, the relevant inflation measures have already been coming down." He added that importantly, there are no signs of labor market imbalances that would push inflation higher.
Williams believes the US economy as a whole is not overheating. "We are indeed experiencing specific shocks, but beyond that, there is no additional inflation pressure." However, he also acknowledged that demand related to AI infrastructure buildout is outpacing supply, and this imbalance will not be resolved in the short term.
He said, "The current situation is quite unusual. One segment of the economy seems to be running at full speed, and that will continue for some time. But I think what really matters is looking at the overall economy."
Williams remains optimistic that AI will ultimately deliver productivity gains, producing a disinflationary effect. However, he said it is difficult to predict when that impact will materialize.
Forward Guidance
Williams also discussed a speech he delivered on September 29, which played a key role in curbing market expectations that the Fed would hike again this month. At the time, Williams said the Fed was in no rush to raise rates again after the September hike. Fed Vice Chair Philip Jefferson subsequently made similar remarks.
Many Fed watchers speculated that these speeches were coordinated in advance, possibly with Fed Chair Kevin Warsh, to avoid surprising investors.
Williams said on Tuesday that market pricing is "useful information," but his remarks reflected only his own views. He said, "In September, we already had two months of data. That gave us an opportunity to assess and judge what the underlying inflation trend is telling us."
The New York Fed president holds a permanent vote on monetary policy decisions and serves as vice chair of the Federal Open Market Committee. By tradition, the New York Fed president, along with the Fed chair and the vice chair of the Board of Governors, forms the central bank's leadership "troika."
Williams said, "I maintain regular contact with the Chair. We meet frequently, but beyond that I don't intend to say more."
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