Fed's Williams says inflation fight has more work to do

what happened

New York Fed President John Williams said on Thursday that the US central bank will likely raise rates again. He described the economy as strong, the labor market as still strengthening and inflation as persistent. Bringing it back to the 2% goal must happen in a timely way and on a sustained basis, he added. Williams did not say when the next increase would come or how large it would be.

According to Reuters, markets broadly expect a quarter-point rise in the federal funds range, from 3.75% to 4%, at the December FOMC meeting, followed by another move in January. The debate over a tougher stance intensified after inflation data came in hotter than expected, with core prices rising 0.3% in October. Some Fed officials, including Cleveland Fed President Beth Hammack, favor a more modest and steady pace of hikes.

Williams also said the central bank cannot lower the absolute level of prices, since rates only affect the rate of change. Trying to reverse prices, he argued, would cause serious damage to the economy, and the higher cost of living is a consequence of the inflation of recent years.

why it matters

For markets, the key signal is that rates may keep rising. That supports the dollar and pressures bonds and other assets sensitive to borrowing costs. If the Fed does not aim to reverse the price level, the strain on consumers could persist for longer.

market impact

US dollar and Treasuries: expected further hikes support the dollar and weigh on bonds

• ▲US dollar pressure up — expectations of higher rates lift yields on dollar assets
• ▼US Treasuries pressure down — higher rate expectations push down prices of existing bonds

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