Fed's Williams Signals Only One More Rate Hike Needed

New York Federal Reserve President John Williams indicated only one more interest rate hike may be needed, aligning with median FOMC projections and cooling market expectations. Williams cited easing inflation pressures and a balanced labor market as reasons for his outlook, though he emphasized significant uncertainty.

Williams said he has not changed his view that it may be appropriate to have one more rate hike. He stated he does not think at this time he has any reason to believe that more rate hikes would be needed after that. The economy is not overheating he added, and measures of underlying inflation have come down. Williams reiterated he still believes disinflationary forces are at play and sees no sign the labor market is out of balance and contributing to inflation. He emphasized the high level of uncertainty around his outlook.

AI and transitory shocks in focus

Williams said price pressures from the AI infrastructure build-out should be overcome by cooling inflation. He acknowledged demand related to AI is outpacing supply, a mismatch that won't be resolved soon. It is unusual to have a sub-sector running at full capacity for an extended period, he noted.

Despite this, Williams remains optimistic AI will eventually deliver productivity gains that are disinflationary. Predicting when those gains will occur is extremely difficult. He said the impacts from tariffs and an energy price shock are fading. These effects are present but not indicating upward movement in underlying inflation. AI is the inflation driver he is watching most closely.

Market reaction and policy context

US Treasury yields on two-year notes edged lower after Williams’ remarks, erasing an increase of as much as three basis points. His comments aligned him with the median of rate projections from Fed officials after September's quarter-percentage-point increase.

Williams said he firmly supported that September hike after two factors altered the short-term inflation outlook. Earlier expectations of Iran conflict resolution and falling oil prices proved overly optimistic. Secondly, the spread between oil and refined product prices increased markedly, representing an additional shock from higher fuel costs.

On September 29, Williams delivered a speech key in reining in market expectations for another increase. In it, he said there was little urgency for the Fed to hike again after the September move. Vice Chair Philip Jefferson made similar remarks afterward. Many Fed watchers speculated the speeches were coordinated to avoid surprising investors. On Tuesday, Williams said market pricing is useful information but his September speech reflected only his own views.

The president of the New York Fed holds a permanent vote on monetary policy and acts as vice chair of the FOMC. Williams said he is in regular contact with the chairman and they meet frequently.

Contrasting views and broader outlook

Other Fed officials project more hikes than Williams. Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan have said more than one additional rate move will be needed to bring inflation to 2%. Investors currently anticipate the Fed will raise rates in December and twice more in 2027 based on federal funds futures pricing.

Williams offered a different view. "I haven’t changed my view that it may be appropriate to have one more rate hike," he said. He doesn't see a rate hike in 2027. It is still mid-October and the economy is affected by many influences, he cautioned.

The Fed's primary tool is adjusting interest rates to meet its mandates of price stability and full employment. When inflation is above 2%, the Fed raises rates to increase borrowing costs and strengthen the USD. The FOMC holds eight policy meetings a year, attended by twelve officials.

What comes next for policy

Policymakers will get a fresh Consumer Price Index report on Wednesday, the last one before the October 27-28 FOMC meeting. Williams said in September they had two months of data to assess underlying trends.

Williams will continue to watch the AI component of inflation closely ahead of the Oct. 27-28 FOMC meeting.