Fed’s Williams Signals Rate Hikes Possible if Inflation Stays Elevated

Federal Reserve Bank of New York President John Williams said the U.S. central bank remains optimistic that inflation will gradually ease, but warned that policymakers are prepared to raise interest rates if price pressures fail to move back toward the Fed’s 2% target.

Williams said his baseline expectation is for inflation to moderate during the second half of 2026 and continue declining in 2027, provided energy prices stabilise, trade related inflationary pressures ease and the U.S. economy remains resilient.

Williams said he is closely monitoring core inflation over the coming months to determine whether underlying price growth is on a sustained path toward the Fed’s long term objective. He reiterated that the current monetary policy stance remains “well positioned” but stressed that the Federal Reserve would act if inflation does not continue to improve.

“If the economy is not on a trajectory that will bring inflation back down to 2%, it would absolutely be appropriate to act,” Williams said, signalling that further rate increases remain an option if necessary.

The comments follow last week’s decision by the Federal Open Market Committee (FOMC) to keep its benchmark interest rate unchanged at 3.50% to 3.75%. While Williams supported the decision, three Fed officials dissented, arguing that inflation has remained too high for too long and may require tighter monetary policy.

Inflation, measured by the Fed’s preferred gauge, stood at 3.7% year on year in June, remaining well above the central bank’s target. Williams said uncertainty persists because of global risks, including conflict in the Middle East and trade tariffs, but he expects those pressures to gradually diminish if conditions stabilise.

Williams also dismissed suggestions that the Fed would simply follow financial market expectations when setting interest rates, saying policymakers would continue to rely on economic data and independent analysis when making decisions.

On artificial intelligence, Williams expressed confidence in the long term outlook despite recent market volatility, noting that leading AI companies remain financially strong and that current borrowing levels do not pose the kind of systemic risks seen before the 2008 financial crisis.