Cooling Prices Mean the Fed Can Stay Patient, Williams Says

The Fed's Decision Last Week

Recent price reports have been encouraging. A separate measure of consumer prices also fell as gasoline costs declined. Crude oil has slipped further in recent days on reports that U.S.-Iran peace talks were resuming.

At last week's meeting, the Federal Open Market Committee left its benchmark rate in a range of 3.5% to 3.75%. Three officials dissented, favoring a quarter-point increase. The Fed's preferred inflation gauge, the personal consumption expenditures index, slipped 0.1% in June, providing more evidence that price pressures are cooling.

Williams's View on Rates

Williams said: "My forecast personally is for inflation to come down in the second half of this year and come down further next year."

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"I think monetary policy currently is well positioned in where we are today to support that disinflationary path," he added.

Williams also said the Fed would not hesitate to tighten again if inflation fails to ease as expected. "If the economy is not on a trajectory that will bring inflation back down to 2% and we would, in my view there would be, it would absolutely be appropriate to act to get us on a trajectory that does bring inflation back to 2%," he said.

The Path Back to 2%

Williams said he expects price pressures outside food and energy to soften now that the Middle East conflict is no longer adding to costs.

"I am quite honestly focused quite a bit on what are we seeing in the core inflation data over the next several months, and is that consistent with a kind of a run rate of inflation moving towards 2% and really on a disinflationary path consistent with us achieving our 2% inflation goal on a sustained basis by 2028," Williams said.

He said he does not expect the Middle East conflict to add fresh upward pressure to prices this year or next, though he cautioned that conditions could alter that outlook. The recent drop in gasoline and crude oil prices has helped ease headline inflation, but Williams's focus remains on core inflation, which strips out volatile food and energy costs, to judge whether the slowdown is durable. Taken together, the June PCE reading and the drop in consumer prices give Williams some evidence that inflation is moving in the right direction. The key question, he suggested, is whether core inflation continues to slow in the months ahead.

What It Means for Policy

The three dissents at last week's meeting underscore an internal debate about how much longer the Fed should keep rates restrictive. Other officials believe a small increase now could reduce the risk of needing a larger move later. The coming core inflation reports will likely influence how that debate evolves before the next policy meeting. Williams's remarks suggest he is comfortable waiting for more data before changing rates.

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