NY Fed President: Central Bank Is Prepared to Act if Inflation Doesn’t Hit 2%

Federal Reserve Bank of New York President John Williams said in an interview that he is optimistic that inflation will ease gradually, but if they don’t the Fed won’t hesitate to respond with rate increases to ensure price pressures return to target.

In his interview with Reuters, Williams said that should energy prices and trade tariffs have peaked and the economy remains on a solid footing, “I think that some of the big drivers that pushed up inflation” over the last year and half or so “will not be at play as much, and then some of the disinflationary forces that we’ve been seeing” should reassert themselves.

Williams added: “I am quite honestly focused quite a bit on, what are we seeing in the core inflation data over the next several months, and is that consistent with a kind of a run rate of inflation moving towards 2% and really on a disinflationary path consistent with us achieving our 2% inflation goal on a sustained basis by 2028.”

He said, “my forecast personally is for inflation to come down in the second half of this year and come down further next year.”

Policy ‘Well Positioned’

In the interview, Williams reiterated interest rate policy is “well positioned” to bring inflation back to target. But he said that “if the economy is not on a trajectory that will bring inflation back down to 2% … it would absolutely be appropriate to act to get us on a trajectory that does bring inflation back to 2%.”

Currently, inflation stands well above 2% and has not been at or below target in more than five years.

Last week, the Federal Open Market Committee meeting voters left the federal funds target rate range unchanged at between 3.50% and 3.75%. Williams said he “strongly … supported the decision of the committee” to hold rates steady.

Before last week’s meeting, financial markets speculated whether the Fed might raise rates given how high inflation is versus the target and how long it has been above the target. In the 9-3 vote, three members voted to increase rates in hopes of pushing inflation downward.

The inflation measure the Fed uses for its 2% target rose 3.7% in June on a year-over-year basis. The Fed still faces upward pressure from supply shocks triggered by things like the Iran war and President Donald Trump’s tariffs, as well as demand pressures from things like hefty business investments in artificial intelligence.

“Inflation has remained stubbornly above 2% for more than five years, and I am not confident it will return to our objective on its own,” Cleveland Fed President Beth Hammack said.

Improvement Could be Swift

Williams said there is uncertainty around the outlook right now and that the renewal of conflict in the Middle East makes it unclear when energy prices might fade. He said, however, that once there is a resolution and shipping traffic resumes, improvement could be swift.

“I don’t anticipate, at least based on what’s happening so far in my base case, that we’re going to see … continued inflationary push in the second half of the year or the next year from the from the conflict in the Middle East, but that’s something that obviously could change depending on circumstances,” Williams said.

Asked if the Fed would feel bound to set monetary policy based on market levels, Williams answered “absolutely not,” although the Fed closely watches financial markets.

“We always have to come do our own analysis, do our hard work, assess all of the … factors influencing the economy, the outlook,” Williams said.