New York Fed President John Williams said on July 15 that inflation at about 4% is "clearly too high," but there are signs it may have already peaked and could gradually move lower over the next few quarters. He said the current monetary policy stance is in a "good place."
Williams lays out six reasons for optimism
Williams listed six factors behind that view. He said the effect of tariff-driven price increases has largely been released, housing inflation should continue its downward trend, oil prices may already have peaked, supply-demand imbalances linked to AI investment could ease as supply increases, the labor market is not creating additional inflation pressure, and longer-term inflation expectations remain stable.
He expects headline inflation to fall to about 3.25% by the end of this year and return to the Fed's 2% target in 2028.
Energy prices and AI investment remain sources of uncertainty
Williams also pointed to two areas of uncertainty. Renewed tensions in the Middle East have added uncertainty to the outlook for energy prices. At the same time, the scale and duration of supply-demand imbalances tied to AI investment remain highly uncertain.
On growth and employment, Williams said he expects the U.S. economy to grow 2% to 2.25% this year, while the unemployment rate is projected to move from the current 4.2% to 4% by 2028.
July meeting in focus after softer CPI
After June CPI came in below expectations, markets increased expectations that the Federal Reserve will leave interest rates unchanged at its July meeting. At the Fed's first meeting chaired by Warsh, policymakers had already kept rates unchanged at 3.50% to 3.75%, but officials remained split on whether another increase is needed this year.
Among 18 officials, half expect at least one 25 basis point rate hike, while the other half see no need for a change. Warsh told a House hearing on Tuesday that the improvement in June inflation does not mean the job is done. He said the July meeting will center on "how and when to use policy tools," with the path ahead still dependent on inflation data, energy prices, and economic growth.