President of New York Federal Reserve, Williams: May raise interest rates once more within the year, no need for further tightening in 2027

According to Zhitong Finance APP, New York Fed President John Williams said on Tuesday that he still believes it is appropriate for the Federal Reserve to raise interest rates once more this year, but he does not currently see a need for the central bank to further raise rates in 2027.

"My view hasn't changed. One more rate hike may be appropriate," Williams said in an interview at the New York Fed on Tuesday. "I don't think we need to take further action after that, and I have no reason at the moment to believe it's necessary."

Williams noted that as the impact of tariffs and energy price shocks gradually fades, there are still signs that inflation will "quite noticeably" slow down next year and approach the Fed's 2% target. He added that, along with other signs of easing underlying inflation, this should be enough to offset upward price pressures resulting from artificial intelligence (AI) infrastructure development.

After Williams' remarks, U.S. Treasury yields edged lower, with the two-year Treasury yield, the most sensitive to Fed rate policy, giving back up to 3 basis points of earlier gains.

Williams' comments align with the median forecast released by Fed officials after they agreed to a 25 basis point hike at their September meeting. However, some of his colleagues—including Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan—have made it clear that more than one additional hike may be needed to bring inflation back to 2%.

Based on federal funds futures pricing, investors currently expect the Fed to raise rates in December and again twice in 2027.

Williams emphasized the high uncertainty facing his outlook and stated he is still closely monitoring AI-related influences on inflation. "It's only mid-October," he said. "The current economy is facing many different forces, and we have to keep watching the data."

Policymakers are set to receive the latest Consumer Price Index (CPI) inflation report on Wednesday, which will be the last such report before their October 27-28 meeting.

From Cautiousness to Supporting September Rate Hike

Williams was not among the officials strongly advocating for a rate hike prior to the September decision. But he said that after two factors changed the short-term inflation outlook, he "firmly supported" the September hike.

First, earlier market expectations that the Iran conflict could be resolved and oil prices would fall proved overly optimistic; second, in recent months, the spread between crude oil prices and refined product prices has widened significantly.

"I think we've seen additional shocks, or these factors have further materialized in the form of steep rises in refined product prices," he said.

But this has not changed his longer-term outlook on prices. "I still think that disinflationary factors are at play," he said. "We have indeed been affected by tariffs and energy prices, and now AI as well. But I don't think some of these factors indicate that underlying inflation is on the rise. In fact, these core inflation indicators have already declined."

Equally important, he added, there are no signs that labor market imbalances are driving inflation higher. "This is not an overall overheated economy," he said. "The recent additional inflationary pressures have not surpassed what we have experienced from these specific shocks."

However, Williams acknowledged that demand related to AI infrastructure is currently exceeding supply, and this mismatch will be hard to address in the near term. "There is a segment of the economy that appears to be running at full speed—and is likely to continue for a while—which is an unusual situation," he said. "But I think the key is to look at the overall economy."

He remains optimistic that AI will ultimately deliver productivity gains of a disinflationary nature, but said it is extremely difficult to predict when this will happen.

Williams said that in recent years his estimate of the neutral rate of interest—the rate that neither stimulates nor restrains the economy—has edged up. He now places the real neutral rate, excluding inflation factors, at around 1% "or slightly above 1%." Notably, Williams is a co-author of one of the most frequently cited models for estimating the neutral rate.

"If the economy performs as I expect over the coming year, we're not far from the neutral rate," he said.

On Late September Speech and 'Forward Guidance'

Williams also discussed his September 29 speech—which played a key role in dampening market expectations for another rate hike this month. At that time, he said that following the September increase, the Fed did not need to act again in haste. Fed Vice Chair Philip Jefferson later made similar remarks.

Many Fed watchers have speculated that these statements were coordinated, perhaps in conjunction with Fed Board Chairman Kevin Warsh, to avoid surprising investors.

On Tuesday, Williams said market pricing is "useful information," but that his speech only reflected his personal views. "In September, we had two months' worth of data in hand, and that was an opportunity to assess and analyze the underlying trend," he said.

The New York Fed president holds a permanent voting seat in monetary policy decisions and serves as vice chair of the Federal Open Market Committee (FOMC). Alongside the Fed Board chair and vice chair, the New York Fed president has long been considered part of the Fed’s policy "troika" leadership.

"I maintain regular contact with the chairman, and we often meet, but I don't want to say any more about that," Williams said.