New York Fed President John Williams said on Tuesday that he still believes one more rate hike this year would be appropriate, but he does not currently see a need for the central bank to raise rates further in 2027.

"My view hasn't changed, one more rate hike could be appropriate," Williams said Tuesday in an interview at the New York Fed. "I don't think we'll need to do more after that, and I have no reason to believe that will be necessary at this point."

Williams said that as the effects of tariffs and energy price shocks fade, there are still signs that inflation will slow "quite noticeably" next year and approach the Fed's 2% target. He said that, combined with other signals that underlying inflation is cooling, this should be enough to offset price pressures from artificial intelligence (AI) infrastructure buildout.

After Williams spoke, U.S. Treasury yields edged lower, with the two-year yield, the most sensitive to the Fed's rate path, giving back gains of as much as 3 basis points.

Williams' remarks were consistent with the median projection released by Fed officials after they agreed to a 25 basis point rate hike at their September meeting. However, some of his colleagues, including Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, have made clear that more than one rate hike will be needed to bring inflation back to 2%.

Based on federal funds futures pricing, investors currently expect the Fed to raise rates in December and to hike twice more in 2027.

Williams emphasized the high degree of uncertainty surrounding his outlook and said he is still closely watching the AI component of inflation. "It's only mid-October," he said. "The economy is being affected by many different factors right now, and we have to keep looking at the data."

Policymakers will receive the latest consumer price (CPI) inflation report on Wednesday, their last such report before the October 27-28 meeting.

Shift from caution to support for September rate hike

Williams was not among the officials strongly calling for a rate hike before September. But he said he "strongly supported" the September increase after two factors changed the near-term inflation outlook. First, earlier market expectations that the Iran conflict might be resolved and oil prices would fall proved overly optimistic; second, the spread between crude oil prices and refined product prices widened noticeably in recent months.

"I think we saw additional shocks, or these factors showed up further in the form of a sharp increase in refined product prices," he said.

But that did not change his longer-term outlook for prices. "I still think disinflationary factors are at work," he said. "We did get hit by tariffs and energy prices, and now AI on top of that. But I think some of these factors do not indicate that underlying inflation is rising. In fact, these underlying inflation measures have come down."

Equally important, he added, there is no sign that the labor market is imbalanced and pushing inflation higher. "This is not an economy that is overheating overall," he said. "The new inflationary pressures right now are not beyond the scope of these specific shocks we've experienced."

Still, Williams acknowledged that demand related to AI buildout is outpacing supply, and that this mismatch will be difficult to resolve in the short term. "It's unusual to have one segment of the economy that seems to be running at full speed and will continue to do so for some time," he said. "But I think the key is still the overall economy."

He remains optimistic that AI will ultimately deliver disinflationary productivity gains, but he said it is extremely difficult to predict when that will happen.

Williams said that in recent years his estimate of the neutral rate, the level of interest rates that neither stimulates nor restrains the economy, has moved higher. He now puts the real neutral rate, excluding inflation, at 1% "or slightly above 1%." It is worth noting that Williams is a co-author of one of the most frequently cited models for estimating the neutral rate.

"If the economy performs in line with my expectations over the next year, then we're not far from the neutral rate," he said.

On his late-September speech and "forward guidance"

Williams also discussed his September 29 speech, which played a key role in curbing market expectations for another rate hike this month. He said at the time that after the September increase, the Fed did not need to rush to act again. Fed Vice Chair Philip Jefferson subsequently made similar remarks.

Many Fed watchers speculated that the speeches were coordinated, possibly with Fed Chair Kevin Warsh, to avoid surprising investors. On Tuesday, Williams said market pricing is "useful information," but his speech reflected only his personal views.

"In September we had two months of data in hand, and that was an opportunity to assess and judge underlying trends," he said.

The New York Fed president has a permanent vote on monetary policy decisions and serves as vice chair of the Federal Open Market Committee (FOMC). Along with the chair and vice chair of the Fed's Board of Governors, the New York Fed president has historically been seen as a member of the central bank leadership's "troika."

"I stay in regular contact with the chair, we meet often, but I don't want to say more about that," Williams said.