Fed's Williams Says No Urgency for Another Rate Hike, Pushing Back on Market Bets
By Michael S. Derby and Ann Saphir
BUFFALO, Sept 29 (Reuters) -Federal Reserve policymakers likely need only one more rate increase this year to put inflation on a path back to the central bank’s 2% goal, New York Fed President John Williams said on Tuesday, pushing back against growing market expectations for earlier policy tightening.
“With the policy action we took at our September meeting, there is no need for urgency,” Williams said at the University at Buffalo in Buffalo, New York. Watching incoming data before deciding what comes next “should provide greater clarity” on how the economy is performing, he said.
“If the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year to support a timelier return of inflation to target,” Williams said. “That is just my forecast, and time — and the totality of the data — will tell.”
The unusually pointed message landed with financial markets. Traders quickly pared heavy bets on an October rate hike and shifted toward pricing a single increase this year, most likely at the Fed’s mid-December meeting.
That shift underscored how sensitive investors remain to any signal from Fed leaders, especially after the central bank’s September meeting. The Fed two weeks ago raised its overnight target rate range by a quarter percentage point to 3.75%-4.00%, and a majority of policymakers signaled another increase would likely be appropriate this year.
Fed Chairman Kevin Warsh, however, has said nothing about his own rate-path expectations. In the weeks since the September meeting, traders had added to bets that rising oil prices tied to the seven-month-old Middle East conflict would force the Fed to act again soon.
Hawkish Fed commentary also fed that narrative, including from Fed Governor Michael Barr, who reiterated on Tuesday the case for “further policy adjustments” after high energy prices and strong AI-related demand knocked inflation off course from progress toward 2%.
Williams signaled on Tuesday that traders might be getting ahead of themselves, even as he stressed the importance of containing inflation. His remarks carry particular weight: the New York Fed president typically works closely with the Fed chair to shape monetary policy and serves as vice chair of the rate-setting Federal Open Market Committee.
INFLATION ABOVE TARGET
Economists polled by Reuters estimate that inflation by the Fed’s targeted measure rose 3.7% in the 12 months through August, nearly twice the Fed’s goal.
“It is imperative that we return inflation to our 2% target on a sustained basis,” Williams said. “To do so, we must make certain that adverse inflationary disturbances do not become entrenched, and that any second-round effects on inflation remain muted.”
Williams said he sees inflation ending the year around 3.5%, with price pressures easing next year on the way toward getting inflation back to target in 2028.
With the economy growing robustly and the job market holding in, price pressures remain the main focus for monetary policy, Williams and other Fed policymakers said. The tension inside the Fed is whether to keep pressure on inflation without overtightening an economy that is still expanding.
“The fact that we’ve now been five and a half years above the 2% target with inflation — that’s playing with fire. That’s really playing with fire,” Chicago Fed President Austan Goolsbee told an audience in central Illinois. “We’ve got to get some evidence that inflation is coming back down, that these things that are supposed to be temporary are, in fact, going away — otherwise, by definition, they’re not temporary.”
At the same time, Goolsbee said he is among the more optimistic Fed officials in that he expects the Fed eventually to be able to cut rates.
In his first four months as Fed chair, Warsh has given little sense of where he thinks interest rates ought to go, saying he wants financial markets to stop paying so much attention to central banker pronouncements and more attention to what economic data suggests the Fed may need to do to keep inflation in check.
In remarks delivered in London, St. Louis Fed President Alberto Musalem said it is important for central bankers to tell the public what they think.
“A central bank that does not explain how or why it makes policy decisions leaves the public to guess” about policy decisions, Musalem said, “which results in added premiums for uncertainty,” and ultimately higher interest rates for businesses and households, and more risk of inflationary or even deflationary spirals where public behavior becomes self-reinforcing.
“The communications choice before us is not between noisy overpromising and stoic silence. It is between leaving the public to guess how the central bank thinks and telling them,” Musalem said.
(Reporting by Michael S. Derby, Ann Saphir and Howard Schneider; Writing by Ann Saphir; Editing by Andrea Ricci and Nick Zieminski)