Federal Reserve Bank of New York President John Williams said Monday he expects inflation to cool gradually and reach the Fed's 2% target by 2028, but warned the central bank would raise interest rates if price pressures fail to ease.
Williams said he expects inflation to fall in the second half of 2026, but the Fed will act if it stays above its 2% target
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Federal Reserve Bank of New York President John Williams said Monday he expects inflation to cool gradually and reach the Fed's 2% target by 2028, but warned the central bank would raise interest rates if price pressures fail to ease.
Williams told Reuters his attention is squarely on what core inflation readings over the next several months reveal about whether price pressures are genuinely moving toward the Fed's 2% goal on a durable basis by 2028. "My forecast personally is for inflation to come down in the second half of this year and come down further next year," he said. He added that should the economy fall short of a path toward 2% inflation, "it would absolutely be appropriate to act to get us on a trajectory that does bring inflation back to 2%."
Williams said current interest rate policy is "well positioned" and that he supported last week's decision by the Federal Open Market Committee to hold the federal funds target rate in a range of 3.50% to 3.75%.
The Fed's preferred inflation gauge, the personal consumption expenditures index, stood at 3.7% on a year-over-year basis in June, well above the 2% target. Price growth has exceeded the 2% target every year for more than half a decade.
Williams said he does not expect the conflict in the Middle East to keep pushing inflation higher through the rest of the year and into 2026, though he acknowledged the situation could change. He said that a resolution to the conflict, combined with a reopening of normal shipping lanes, could allow conditions to improve rapidly.
Three Fed officials dissented at last week's meeting in favor of a quarter-point rate increase, arguing that inflation has remained too high for too long. Cleveland Fed President Beth Hammack said she is not confident inflation will return to the 2% target without action. Hammack put her position plainly in a statement released after the meeting: "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."
The June PCE reading was shaped in part by a brief ceasefire in the U.S.-Iran conflict that temporarily pushed energy prices lower. That truce has since collapsed, renewing upward pressure on prices. The next PCE release, covering July, is scheduled for August 26.
Williams also said he does not see financial stability risks from business investment in artificial intelligence, noting that leverage levels among AI-focused firms are not comparable to those that contributed to the financial crisis two decades ago. "Most of these businesses have very high earnings, so I'm not as worried about the financial stability from the leverage right now," he told Reuters.
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