New York Fed President William Williams said Wednesday that despite market expectations for rate hikes in coming months, he sees multiple signs that inflation has peaked and could allow the central bank to keep rates on hold.
In a speech to local business leaders, Williams cited five reasons why he expects recent price increases to have run their course.
“There are encouraging reasons to expect inflation to peak and decline modestly in the coming quarters,” he said.
He later added: “We expect overall inflation to decline to around (3.25%) percentage points by year-end and then be on track to reach the 2% target in 2027 and reach the target in 2028.”
Inflation soared this year after the United States and Israel attacked Iran in late February, sending oil prices soaring. Williams cited the lingering effects of tariffs and accelerated technology spending as the main factors, as well as the war.
But he sees signs that these and other factors are easing.
Specifically, there should be no “significant additional impulse” from the tariffs, as the expired tariffs are simply replaced by one tariff. At the same time, oil prices have “likely peaked and will approach pre-battle levels,” he said.
Investment in artificial intelligence is seen as another factor, but Williams said the “imbalance” should narrow over time as more supply comes online. He also noted that the labor market is not a source of inflation and concluded that inflation expectations are also “well anchored,” giving Fed policy some breathing room.
“Economic growth is strong and trending, and the labor market is similarly strong and stable,” he said. “However, as inflation remains high, it is imperative that we sustainably return inflation to the Fed’s long-term goal of 2%. The current stance of monetary policy is well positioned to achieve that.”
Despite this, the market still expects the Fed to raise rates as early as September. Although by a narrow margin, Williams’ colleagues on the Federal Open Market Committee in June also approved a quarter-point increase by the end of the year.
The remarks came a day after the Bureau of Labor Statistics reported that consumer prices unexpectedly fell 0.4% in June, bringing the annual inflation rate to 3.5%. This was the largest one-month rate of decline in prices since April 2020, but it remained far short of the Fed’s inflation target.
Federal Reserve Chairman Kevin Warsh told the House Financial Services on Tuesday that the latest price drop was not a “mission accomplished” moment. “That’s not my view,” he said.
