John Williams, President of the Federal Reserve Bank of New York, attributed rising long-term bond yields to robust economic fundamentals rather than inflation concerns. In his latest comments to CNBC, Williams stated that "what's driving it...is really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general." He emphasized that this represents more of a reflection of economic strength than financial conditions affecting the economy, noting that "it's not really about financial conditions affecting the economy, it's more about the economy affecting financial conditions." Market moves have rattled investors and even prompted action by the Treasury Department aimed at helping limit the increase in real-world borrowing costs.
Williams downplayed concerns about inflation driving the surge in borrowing costs, noting that "it's our job" to achieve price stability and "nobody else can do that for us." As reported by CNBC, he indicated that higher borrowing costs don't necessarily drive monetary policy choices, as the central bank must maintain responsibility for bringing inflation back to the 2% target. Williams framed the upcoming rate decision as complicated, stating there's "no clear science" that says monetary policy is currently in the right position to accomplish Fed objectives and lower inflation to target in the next year or so. He noted that "when it comes to getting price pressures down, I would say that the data recently have been encouraging towards that, but again we can't just look at a month or two" to be confident inflation is headed in the right direction.
Investors widely expect the Federal Reserve to raise the 3.5% to 3.75% federal funds target rate range at its September 15-16 Federal Open Market Committee meeting. According to CNBC reports, many central bankers have signaled alarm at inflation persistence above the 2% target and have either called for or signaled openness to raising rates. Fed Chairman Kevin Warsh indicated willingness to act if price pressure conditions warrant it, while Williams noted that recent data have been encouraging toward reducing inflation pressures. However, recent developments suggest there may be challenges ahead, with Warsh potentially not having all the votes needed to hike rates at the upcoming FOMC meeting. Fed funds futures currently peg nearly 70% odds of a rate hike, though prediction markets are closer to a toss-up, with the two-year T-note treating a hike as a fait accompli at a 4.4% yield.
Williams identified trade tariffs and Middle East war as the main reasons inflation currently exceeds the 2% target, though expectations over future inflation remain in check. As reported by CNBC, he emphasized that "we can't just look at a month or two" to be confident inflation is headed in the right direction. Williams stated his September FOMC decision will "depend on the data and depend on some of the risks to achieve our goals," noting the central bank must "just keep watching" economic indicators going into the meeting. He also indicated that "my view is that we just have to keep watching" the data going into the meeting, maintaining his cautious approach to policy decisions despite the market's expectations for a rate hike.
