New York Fed President "doves out": inflation has peaked, current interest rates are "in the right place"

On Wednesday local time, New York Fed President John Williams stated that although demand generated by artificial intelligence (AI) investments is putting upward pressure on inflation, the current interest rate level is "at a reasonable position." He also cited multiple reasons to believe that inflation has peaked and will gradually decline in the coming quarters. In a speech prepared for an event in New York, Williams said, "I am confident that these investments will support strong productivity growth in the coming years. But right now, we are in a race between available supply and surging demand." However, he also emphasized, "The current monetary policy stance is well-positioned to push inflation back to the Fed's 2% target." "Inflation is undoubtedly too high, currently around 4%, much higher than the Federal Open Market Committee's long-term target of 2%," Williams also released an optimistic signal, "but there are encouraging reasons to expect that inflation has peaked and will gradually decline in the coming quarters." He expects overall inflation to drop to around 3.25% by the end of this year, continue sliding towards the 2% target in 2027, and ultimately reach the target in 2028. Williams listed several factors supporting his judgment that inflation has peaked. He pointed out that the additional pressure on prices from tariffs has mostly been released, housing inflation is still trending downward, energy prices may have peaked, the labor market has not added inflationary pressure, and inflation expectations remain well-anchored. Regarding the supply-demand imbalance caused by AI investments, he expects this pressure to dissipate over time. Williams stated, "With more supply coming online, the imbalance brought by AI-related investments should gradually ease, although the scale and duration of the imbalance still have a high degree of uncertainty." In terms of the economy and employment, Williams expects the U.S. economy to grow by 2% to 2.25% this year. The labor market shows signs of resilience and stability, and the unemployment rate will "very slowly" decrease from the current 4.2% to 4% in 2028. Williams' somewhat moderate stance contrasts with the latest inflation data and internal divisions within the Fed. The unexpected 0.4% monthly drop in the U.S. consumer price index for June and the year-on-year increase falling to 3.5%, mainly driven by a decline in energy prices, was reported the previous day. However, Fed Chair Jerome Powell explicitly stated during a congressional hearing that this does not mean "mission accomplished." Powell revealed that the committee will engage in a "robust internal debate" on the degree and timing of using tools at the meeting on July 28-29. In fact, policymakers' views on the interest rate path are clearly divided. In the dot plot released last month, half of the 18 officials expected to raise rates by at least 25 basis points within the year, with a few even leaning towards tightening policy at the previous meeting. Earlier this week, Fed board member Lael Brainard also stated that if price pressures continue to spread, the committee may need to further raise rates in the short term. Currently, rate futures market pricing also indicates that the Fed may resume raising rates as early as September. The federal funds target range has been held at 3.50% to 3.75% since December last year. It is also worth noting that Williams' judgment on energy prices peaking is based on the assumption that oil prices have fallen due to easing geopolitical tensions. However, at the time of his speech, the situation in the Middle East has become tense again, causing oil prices and related energy costs to rise once more, adding new variables to the inflation outlook.