Williams forecasts inflation peaking at 2.75-3 percent in first half, reaching 2 percent goal in 2027.
“I expect inflation will be just under 2-1/2 percent for this year as a whole, before reaching the FOMC’s longer-run 2 percent goal in 2027.”
Williams forecasts inflation at 3 percent in 2026, returning to 2 percent target in 2027.
“Looking ahead, my base case is for inflation to be about 3 percent this year, before dropping to our 2 percent target in 2027 as the effects of tariffs and energy prices move into the rearview mirror.”
Williams notes Latin American central banks raised rates before the Fed in 2021 to protect credibility.
“12 Latin American central banks acted quickly and decisively to tame high inflation by raising interest rates, starting with Brazil in the spring of 2021, followed by Chile, Colombia, Mexico, and Peru later that summer.”
Williams says further rate cuts will eventually be warranted to prevent policy from becoming inadvertently restrictive.
“Looking further ahead, if inflation follows the path I expect, further reductions in the federal funds rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive.”
Williams reports FOMC maintained fed funds rate at 3.5 to 3.75 percent at mid-June meeting.
“Accordingly, at its meeting in mid-June, the FOMC decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent in support of the Fed’s dual mandate.”
Williams expects inflation to fall to 3.25 percent by year-end, reaching 2 percent target in 2028.
“For the reasons I outlined a moment ago, I expect overall inflation to decline to around 3-1/4 percent by year-end, then continue on a glide path toward our 2 percent goal in 2027 and land on target in 2028.”
Williams anticipates moving interest rates toward neutral stance over time if progress continues on dual mandate.
“Looking ahead, if progress on our dual mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time.”
Williams sees policy as modestly restrictive and room for further near-term rate cuts toward neutral.
“Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral,”
Williams says U.S. r-star models show only a modest quarter to half point increase since 2018.
“This finding that r-star has not meaningfully rebounded is in line with evidence from a variety of models of r-star in the U.S., which show a relatively modest increase of one-quarter to one-half of a percentage point in real-time estimates of r-star between the third quarter of 2018 and the first quarter of 2025.”