Reuters interviewed New York Federal Reserve President John Williams on July 31, two days after the most recent Federal Open Market Committee gathering. The conversation touched on the main forces keeping inflation above the Fed's 2% objective, how those forces may evolve, and how the central bank is weighing policy. Below is a reorganized and original account of that discussion, edited for clarity and flow.
Setting the scene
Williams began by framing his analysis around three distinct categories of inflationary pressures. He said separating these channels - the effects of tariffs, the consequences of geopolitical conflict in the Middle East, and unusually strong demand in specific areas related to AI-driven investment and activity - helps clarify the outlook.
Tariffs
On tariffs, Williams said most of the inflationary impact tied to existing tariffs has already been recorded in U.S. prices. He referred to research and data that, in his view, support the conclusion that the large majority of tariff-related effects have now passed through to consumer prices. As a result, he does not expect tariffs to be a major source of further inflation in the months ahead, assuming the mix of tariffs does not change substantially.
He also addressed recently announced tariff actions, characterizing them as largely replacing expiring measures and, on net, amounting to a modest uptick in the average tariff rate. That modest change does not alter his broader assessment that tariff effects on inflation have largely played out in the data observed so far.
Middle East conflict and energy prices
The second category Williams highlighted is the direct effect of the conflict in the Middle East on commodity prices, particularly oil. He emphasized how developments there have pushed oil prices higher and have included disruptions such as temporary closures of key shipping routes. Those developments, he said, have raised energy and commodity price levels and will likely affect prices for a period of time.
Williams noted that futures markets and some analysts expect a resolution that would reopen energy trade and ease commodity price pressures later in the year. He said that possibility is part of his baseline forecast, but he stressed limited confidence in any specific price path for energy. He characterized the outlook as one in which oil prices appear to have peaked but where the timing and extent of moderation remain uncertain. Relative to his earlier comments, he acknowledged that oil prices are higher and that the future path is somewhat elevated.
He also cautioned that this part of the forecast is conditional on how the conflict evolves and could change if circumstances shift.
AI-related demand
The third driver Williams identified was strong demand associated with AI-related developments. While he said this demand is not a sizable driver of inflation at present, he flagged it as an area he is monitoring closely. He described pockets of goods and services experiencing price pressure because of very strong demand tied to AI activity and investment.
Markets, inventories and the oil outlook
When asked about whether markets were underpricing the risks tied to oil inventories and a prolonged conflict, Williams said market participants are highly aware of inventory dynamics. He noted that global oil inventories were relatively elevated even before the recent geopolitical episode, which provides some cushion against sharp price spikes. He pointed to actions such as strategic reserve releases and shifts in supplies from other areas as factors that have softened the initial price impact of shipping disruptions.
Williams said market participants often reason that if inventories ran down enough to cause very high oil prices, that outcome would create incentives for involved parties to seek a resolution. He framed that logic as part of why markets may appear less worried: very high prices would impose costs that might motivate a diplomatic or operational resolution, reducing the duration of extreme price stress. He emphasized that market participants examine detailed data - inventories, shipments at sea, reopening timelines - and said their views appear to reflect close attention to those variables.
He also recalled episodes earlier in the year when reopening trade led to a relatively rapid normalization of shipping activity and a meaningful decline in energy prices, suggesting markets factor in the possibility of a quicker normalization if tensions ease.
Has inflation risk changed since June?
Asked whether the inflation risk outlook had worsened since the June FOMC meeting, Williams described his perspective as broadly similar to the view held in June over the six-week interval. He observed that oil prices were already elevated in June and that although developments have shifted between then and late July, his overall assessment remains comparable. He said tariff developments and recent inflation readings are consistent with his baseline forecast.
Williams reiterated his base-case path to returning inflation to 2%. He explained that if energy prices have peaked and decline gradually, if tariff pass-through has already occurred and no new large tariff shocks emerge, and if the labor market and the broader macroeconomic balance remain sound, then many of the principal drivers that pushed inflation up during the previous 18 months should diminish. He said disinflationary forces seen in the background - for example, lower housing cost contributions - would continue to help bring inflation down.
Williams predicted that goods inflation could return to levels that are nearer to zero or slightly negative, and that core services inflation excluding housing could gradually decline. He stressed that energy outcomes remain an important caveat because those depend on developments in the Middle East.
He emphasized that over the next several months his attention is focused on core inflation data to see whether they align with a disinflationary trajectory consistent with reaching the 2% goal on a sustained basis by 2028 - a path he described as his base case given the assumptions noted.
Why the Fed held rates steady
Williams addressed the question of why he supported holding the policy rate steady at the recent meeting, even as several colleagues registered dissents calling for a rate increase. He said he strongly supported the committee's decision and described the broader backdrop as one in which growth has been solid but not overheated, with measured GDP growth around 2% over the previous year and slightly less in the first half of the current year. He said those figures point to an economy growing roughly at trend and a labor market that has been stable, noting the unemployment rate has been near constant for about a year.
From his perspective, the headline drivers of the recent inflation surge have been concentrated in particular factors - tariffs, geopolitical events including the Middle East conflict, and other disruptions - rather than pervasive overheating in the broader economy. He argued that these specific contributors should fade in the baseline, enabling underlying disinflationary trends to reassert themselves.
Given that monetary policy operates with lags, Williams said it was appropriate to set policy based on where the economy is likely to be over the next year or two rather than only on past readings. His forecast calls for inflation to move down in the second half of the year and further next year, and he said current monetary policy settings are positioned to support that disinflationary path. He acknowledged alternative scenarios are possible - in which inflationary pressures persist or the economy weakens - and that such outcomes would require reassessing the policy stance. But he framed his support for the hold as consistent with the preponderance of information and his forward-looking outlook.
Would persistent inflation prompt rate increases?
Williams reiterated the FOMC's commitment to return inflation to 2% and said that if the economy is not on a trajectory toward that goal, it would be appropriate to adjust policy to restore a path that does bring inflation down. He declined to spell out specific moves or scenarios that would trigger a change, saying the appropriate response would depend on the conditions and the totality of incoming information. Still, his principle was clear: policy would be adjusted if the outlook deviated from a disinflationary course toward the 2% objective.
Markets versus policymakers
Williams said that monitoring financial markets is a core part of the New York Fed's role because financial conditions influence the economy and because market pricing conveys how investors are synthesizing economic and geopolitical information. He described market reactions - in Treasuries and elsewhere - as the product of many inputs, including economic releases, geopolitical developments, and oil price moves.
He said market participants are working through the same questions the Fed considers - growth, productivity, inflation - and that their conclusions are a useful input. But he emphasized the FOMC must make its own independent assessment. While markets provide a data point that Williams watches closely, he said policymakers will not simply ratify market signals; rather, they will incorporate them into a broader evaluation that prioritizes the Fed's dual mission of maximum employment and price stability.
Do market moves help tighten policy?
On whether rising long-term yields and tighter financial conditions effectively help the Fed by restraining activity and thereby aiding disinflation, Williams acknowledged that financial conditions impact borrowing costs and asset returns, which in turn influence households' and firms' decisions. He declined to accept the phrasing that markets are "doing the work for us," noting the Fed must make its own policy choices, but he conceded that financial market developments do affect conditions in ways relevant to inflation and growth.
Forward guidance and communications
Williams discussed the committee's deliberate pullback from explicit forward guidance. He said the June meeting reflected a broad judgment that the uncertainties facing the economy were such that the committee could not convey clear directional guidance about future policy without undue risk of misleading markets. He described the decision to avoid explicit guidance as appropriate because the committee did not have confidence that it could state with conviction the future path of policy given the prevailing uncertainties.
He noted that forward guidance historically has been used in particular circumstances - for example, around periods when policy was constrained by the zero lower bound, or when the committee believed markets misunderstood its intentions. Williams referenced past episodes in which chairs used different forms of guidance when they considered it useful, and he called the decision to forgo strong forward guidance in the current environment both healthy and fitting for the conditions the committee faces.
Williams observed that forward guidance is a tool whose usefulness depends on the situation - it has been valuable in the past in specific contexts, but is not universally appropriate. The present environment, he said, is one where meeting-by-meeting assessment is preferable to committing to a predetermined path in public communications.
Uncertainty around FOMC meetings
Williams did not view increased uncertainty about meeting outcomes as a problem in itself. He said that because economic data and global events can change the outlook between meetings, it is natural that participants and markets face uncertainty about which specific policy action will be appropriate at the next FOMC meeting. What he did emphasize is clarity about the committee's objective: a firm determination to bring inflation back to 2% on a sustained basis while promoting maximum employment. That commitment, he said, should remain unequivocal even when the specific policy path is uncertain.
Commitment to the 2% goal
Williams stressed that the FOMC's commitment to returning inflation to 2% has been strong and consistent. He emphasized that the committee recognizes inflation has been too high for too long, and that restoring price stability is a fundamental priority. In his view, that commitment is intact and remains a central organizing principle for policy assessments.
He also reflected on measures of expectations and confidence. Williams pointed to the range of indicators - market-based measures of inflation compensation, surveys of consumers and economists, and conversations with businesses and community leaders - that inform the Fed's reading of public and market perceptions. He said surveys and market indicators showed some movement in near- and medium-term inflation expectations when inflation was elevated, but that longer-run inflation expectations remained more stable. He reported no meaningful sign that the FOMC's credibility in keeping inflation anchored had deteriorated.
Internal deliberations and the tone of meetings
Williams described FOMC discussions as robust and thoughtful. He said all 19 participants come prepared with careful analysis, thoughtful views, and a range of perspectives. That diversity of thought, he said, contributes to healthy debate and better policy formation. He noted there are differences over policy details and outlooks, but that there is unanimous commitment to the twin objectives of maximum employment and price stability.
He also mentioned that the committee is looking forward to contributions from internal task forces and outside experts to broaden perspectives on key issues, including new topics such as AI, which is shaping economic conditions in novel ways.
Asset prices, AI, and financial stability concerns
When asked whether he saw bubble-like risks in AI investments, Williams pushed back on the terminology but acknowledged an intense period of enthusiasm and rapid investment. He described AI as a likely transformative, general-purpose technology that will take years of innovation and large-scale investment to realize its full benefits. From a market perspective, he said investors are attempting to gauge in real time how large the economic payoff will be, which firms will lead, and how companies will monetize new capabilities.
On the role of leverage in AI-related investment, Williams said the form of leverage he sees so far is often debt finance combined with equity, and that many of the firms involved have high earnings, which moderates his concerns about near-term financial stability risk from leverage. He did note, however, that market reassessments and increased volatility in equity markets are plausible as investors refine their views on which companies will benefit most and which might be disadvantaged. That kind of volatility, he suggested, is consistent with fast-moving innovation and competition in a rapidly evolving sector.
Concluding observations
Throughout the discussion Williams returned to a few central themes: identify the drivers of elevated inflation, weigh how long those forces will matter, and make policy decisions based on where the economy is likely to be over the policy horizon rather than solely on past conditions. He emphasized that tariffs have largely passed through into prices, that the Middle East conflict has pushed energy prices higher but that futures markets often expect normalization later in the year, and that AI-related demand is a nascent but notable influence on prices in certain areas. Those assessments, together with a view that the labor market is stable and growth is around trend, underpinned his support for the committee's decision to hold rates at the recent meeting while remaining ready to act if the outlook for inflation deteriorates.
Williams framed the Fed's approach as highly data dependent, forward-looking, and centered on the dual mandate. He highlighted the role of ongoing monitoring of market developments and surveys, emphasized the committee's consistent commitment to returning inflation to 2%, and signaled that the path of energy prices and the evolution of core inflation data will be central to policy judgments in the months ahead.
Full interview context
The substance above reflects Williams' responses during the interview on July 31, which took place two days after the FOMC meeting. He addressed the topics summarized here in the context of the Fed's current policy stance, incoming data, and global developments affecting inflation and financial conditions.
End of interview summary.