New York Federal Reserve Chairman “Release Pigeons”: Inflation has peaked and current interest rates are “in a reasonable position”

The Zhitong Finance App learned that on Wednesday local time, New York Federal Reserve Chairman John Williams said that although demand from artificial intelligence (AI) investment puts upward pressure on inflation, the current interest rate level is “in a reasonable position.” He also cited a number of reasons to determine that inflation has peaked and will gradually decline over the next few quarters.

Speaking at an event in New York, Williams stated, “I am confident these investments will support strong productivity growth for years to come. But right now, we're in a race between available supply and surging demand.” However, at the same time, he stressed: “The current monetary policy position is well-positioned, enough to push inflation back to the 2% target set by the Federal Reserve.”

“Inflation is unquestionably too high, currently around 4%, far above the FOMC long-term target of 2%.” Williams also sent an optimistic signal, “but there are encouraging reasons to expect inflation to peak and gradually decline over the next few quarters.”

He expects overall inflation to fall back to around 3.25% by the end of this year, then continue to slide towards the 2% target in 2027, and eventually hit the target in 2028.

Williams listed a number of factors underpinning his judgment that inflation is peaking. He pointed out that the additional pressure on prices brought by tariffs has basically been released, housing inflation is still on the downward channel, energy prices may have peaked, the labor market has not added inflationary pressure, and inflation expectations are still well anchored.

With regard to the imbalance between supply and demand caused by the boom in AI investment, he expects this pressure to subside over time. Williams said, “As more supply comes online, the imbalance between supply and demand caused by AI-related investments should gradually ease, but there is still a high degree of uncertainty about the scale and duration of the imbalance.”

In terms of the economy and employment, Williams expects the US economy to grow by 2% to 2.25% this year. The labor market is showing signs of resilience and stability, with the unemployment rate falling “very slowly” from 4.2% today to 4% in 2028.

Williams' moderate statement contrasts with the latest inflation data and internal differences within the Federal Reserve. The US consumer price index for June, which was announced the day before, unexpectedly fell 0.4% month-on-month, and the year-on-year increase fell to 3.5%, mainly driven by falling energy prices. However, Federal Reserve Chairman Kevin Walsh made it clear during congressional hearings that this does not mean “the task is complete.” Walsh revealed that the committee will have a “good internal debate” on the extent and timing of the use of tools at the July 28-29 meeting.

In fact, policymakers' views on the path of interest rates are clearly divided. According to the bitmap released last month, half of the 18 officials expected to raise interest rates by at least 25 basis points during the year, and a few officials were inclined to tighten policies even at the last meeting. Earlier this week, Federal Reserve Governor Waller also said that if price pressure continues to spread, the committee may need to raise interest rates further in the short term.

Current interest rate futures market pricing also shows that the Federal Reserve may resume interest rate hikes as early as September. Since December of last year, the federal funds rate target range has remained between 3.50% and 3.75%.

Additionally, it is worth noting that Williams' judgment on energy prices peaking was based on oil prices falling due to the easing of geographical conflicts. However, at the time of his speech, the situation in the Middle East was once again tense, and oil prices and related energy costs had risen again, which also added new variables to the inflation outlook.