Fed’s Williams currently sees no need for rate hike in 2027

[NEW YORK] US Federal Reserve Bank of New York president John Williams said he still sees one more interest rate hike as appropriate for 2026, but at the moment does not believe it will be necessary for the central bank to increase rates again in 2027.

“I haven’t changed my view that it may be appropriate to have one more rate hike,” Williams said on Tuesday (Oct 13) in an interview with Bloomberg News at the New York Fed. “I don’t think at this time I have any reason to believe that we would need to do more” after that.

Williams said there are still signs inflation will slow “quite a bit” and approach the Fed’s 2 per cent target in 2027, as the impacts from tariffs and an energy price shock fade.

That, along with other signs that underlying inflation is cooling, should help overcome the price pressures driven by the build-out of infrastructure for artificial intelligence, he said.

US Treasury yields edged lower after Williams’ remarks, with those on two-year notes – most sensitive to the Fed’s rate path – erasing an increase of as much as three basis points.

Williams’ remarks put him in line with the median of rate projections released by Fed officials after they agreed to raise rates by a quarter percentage point at their September gathering.

A number of his colleagues, however – including Cleveland Fed President Beth Hammack and Dallas’ Lorie Logan – have made clear they believe more than one additional move will be required to bring inflation back to 2 per cent.

Investors currently anticipate the Fed will raise rates in December and twice more in 2027, based on pricing in federal funds futures.

The New York Fed chief emphasised the high level of uncertainty around his outlook and, in particular, said he continues to watch the AI component of inflation closely.

“It’s still mid-October,” he said. “This economy is being affected by lots of different influences, and we just have to keep watching the data.”

Policymakers will get a fresh report on consumer price inflation on Wednesday, the last one before they meet on Oct 27 to 28.

September shift

Williams was not among policymakers calling forcefully for a rate increase in the run-up to the September move. But, he said, he “firmly supported” the September increase after two factors altered the short-term inflation outlook.

First, earlier expectations that the Iran conflict might get resolved and oil prices would fall proved overly optimistic. In addition, the spread between oil prices and the prices for refined products increased markedly in recent months. 

“We’ve seen, I think, an additional shock, if you will, or additional manifestation of these developments in terms of much higher fuel costs,” he said.

But that has not altered his longer-term outlook for prices.

“I still believe there’s disinflationary forces at play,” he said. “We definitely had the effects of tariffs and the energy prices, and now with AI. But some of those are, I think, not indicating upward movement in underlying inflation. In fact, these measures of underlying inflation have come down.”

Importantly, he added, there is no sign that the labour market is out of balance and contributing to inflation.

“This is not an economy that is overheating overall,” he said. “This is not an economy where this added inflationary pressure is beyond these particular shocks that we’re experiencing.”

Still, Williams acknowledged that demand related to the AI build-out was outpacing supply, and that mismatch would not be resolved for some time.

“It is an unusual circumstance that we have one sub-sector of the economy that seems to be running at all cylinders and is going to keep going for a while,” he said. “But I think it’s really about looking at the broader economy.”

He also remained optimistic that AI will eventually deliver productivity gains that will be disinflationary. Predicting when that might happen, however, is extremely difficult, he said.

Williams said his estimate for the level where interest rates neither stimulate nor restrain the economy – what is known as the neutral rate – have moved up modestly in recent years.

He currently pegs the real neutral rate – which removes inflation – at 1 per cent “or a little above that”. Williams co-authored one of the most commonly cited models for estimating neutral. 

“If the economy performs over the next year as I expect, we’re not that far from neutral,” he said.

Forward guidance

Williams also spoke about a speech he delivered on Sep 29 that proved crucial in reining in market expectations for another rate increase in October.

In those remarks, Williams said there was little urgency for the Fed to hike again in the wake of the September move. His comments were followed by similar remarks from vice-chair Philip Jefferson. 

Many Fed watchers speculated that the speeches were coordinated, possibly with Fed chairman Kevin Warsh, to prevent a surprise for investors.

On Tuesday, Williams said market pricing was “useful information”, but his speech reflected only his own views.

“In September we had two months of data. It was an opportunity to assess, evaluate what are the underlying trends telling us,” he said.

The president of the New York Fed holds a permanent vote on monetary policy decisions and acts as vice-chair of the Federal Open Market Committee.

Together with the chair and vice-chair of the Fed’s Board of Governors, the New York Fed chief is traditionally considered part of the central bank’s leadership “troika”.

“I’m in regular contact with the chairman,” Williams said. “We meet frequently, but I’m not going to say anything more about that.” BLOOMBERG