Federal Reserve Bank of New York President John Williams indicated on Wednesday that he is not yet convinced the central bank should raise interest rates, advocating for a cautious approach as inflation shows signs of easing.
Speaking on CNBC, Williams emphasized the need to “wait and see” before making any adjustments to monetary policy, citing the complexity of current economic conditions.
Williams: No Clear Science on Policy Sufficiency
Williams, a permanent member of the Federal Open Market Committee (FOMC), noted that there is no definitive answer on whether current policy is adequate to bring inflation back to the Fed’s 2% target within the next year or two. “There’s no clear science right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether we would need to see further action to do that,” he said.
The federal funds rate currently stands at 3.5% to 3.75%. Williams acknowledged that tariffs and a sharp rise in energy prices related to the war with Iran have spilled over into core inflation. However, he expressed confidence that inflation will eventually return to the Fed’s target.
Disaggregating Inflation Data
Williams stressed the importance of examining inflation data piece by piece. “When I think about inflation today, it is important to disaggregate the data, look at the different pieces, and think through that,” he explained. “So far, we’re not seeing the second-round effects or broadening of the tariffs. We’re not seeing unusual broadening of the effects of higher energy prices. We’re seeing well-anchored inflation expectations and pretty contained compensation growth.”
He added, “I am actually seeing the trend in inflation moving slowly down as some of the effects of the tariffs kind of move into the rearview mirror. But we have to be data dependent; got to keep watching that data.”
Mixed Economic Signals Since Last FOMC Meeting
Since the last FOMC meeting, several economic reports have complicated the outlook. Inflation was little changed in July, and the labor market lost jobs, though the unemployment rate ticked down as fewer people entered the workforce.
Market Expectations and Policymaker Divisions
Financial markets have leaned toward a rate hike following Fed Chair Kevin Warsh’s speech last week at the Jackson Hole Symposium, which was viewed as staunchly anti-inflationary. However, the path forward remains unclear, with policymakers appearing divided.
In a speech Tuesday, Fed Gov. Michael Barr said he is open to either hiking rates at this month’s FOMC meeting or holding them steady, depending on the data. Meanwhile, Federal Reserve Bank of Cleveland President Beth Hammack, one of the three dissenters at the last FOMC meeting, reaffirmed her belief that inflation should be addressed promptly. “I don’t want to prejudge anything. But I believe now is the time to act,” Hammack said. “I believe that we’ve been in an inflationary situation for more than five years. It’s been running well above our target. I don’t see any restriction in policy when I look at financial conditions and when I talk to market participants.”
Federal Reserve Bank of Dallas President Lorie Logan and Federal Reserve Bank of Minneapolis President Neel Kashkari also voted for a hike in July. Nonvoting FOMC members Jeffrey Schmid and Alberto Musalem, heads of the Kansas City Fed and St. Louis Fed, respectively, have also expressed support for a hike.
