NY Fed's Williams: Won't Hesitate to Raise Rates If Inflation Doesn't Come Down
Taylor Wilson
New York Fed President John Williams said on August 3 that he still expects inflation to ease in the second half of this year and reach 2% by 2028 — but if it doesn't, the Fed will not hesitate to raise rates. Holding steady is not the endpoint; a hike remains a live option.
Why does he still think inflation will fall?
Williams laid out three pillars: tariff pass-through is largely spent, energy prices may have peaked, and the disinflationary forces already visible before should reassert themselves.
His personal forecast: inflation starts falling in H2 this year, drops further next year, and hits the 2% target by 2028.
This means → he is betting that everything pushing inflation up is a one-off shock, not a structural shift — once the shocks fade, inflation follows.
But he drew a hard line: if the economy cannot bring inflation back to 2%, "it would be entirely appropriate to take action to get it back on track." Put simply = if it won't come down on its own, hike.
Rates are on hold — so why did three officials dissent?
Williams said he strongly supported last week's FOMC decision to keep the federal funds rate at 3.50%–3.75%, calling current policy "well positioned."
Three members voted against, arguing rates should go higher. Cleveland Fed President Beth Hammack was blunt: "Inflation has been stubbornly above 2% for more than five years. I am not convinced it will return to target on its own."
This reflects a deepening split inside the Fed over "wait versus act" — the majority chose patience, but the minority is no longer willing to wait.
Context: the Fed's preferred inflation gauge rose 3.7% year-on-year in June, well above the 2% target and above it for more than five consecutive years.
Three forces driving inflation — where does each stand now?
Tariffs: Williams sees existing tariff pass-through as largely complete. Newly announced adjustments amount to only a modest increase in the average tariff rate — not a game-changer.
Energy: the Strait of Hormuz closure pushed oil prices higher, but futures markets still expect the situation to resolve and prices to ease. He acknowledged significant uncertainty around the oil-price path, noting both spot prices and expectations have shifted up.
AI demand: not a primary inflation driver for now, but price increases in some goods categories tied to strong AI-related demand are on his radar. He added that AI asset-price swings are "normal in a highly innovative, fast-moving environment" and that he sees no financial-stability risk at this point.
Markets are pricing in a hike — does the Fed care?
Ahead of the meeting, long-term Treasury yields climbed steadily and futures priced in a meaningful probability of a rate hike this year.
Williams pushed back directly: the Fed will not let market levels dictate policy — "We have to do our own analysis, assessing all the factors that affect the economy and the outlook."
This means → markets can bet, but the Fed won't follow the bet. Policy timing is set by data, not reverse-engineered from market pricing.
What should we watch next?
Williams said he will closely track core inflation data over the coming months to see whether it is consistent with a path back toward 2%.
He also noted that under new Chair Kevin Warsh, the Fed has shifted to less forward guidance in its communications; markets are still adjusting.
In plain terms = the Fed is no longer going to tell you its next move in advance. Core inflation data is the only signpost — if it improves, they keep waiting; if it doesn't, the window for a hike opens.
Content is for reference only, not financial advice.