Fed’s John Williams says rates could be raised if inflation doesn’t come down

NEW YORK – New York Federal Reserve Chairman John Williams warned on Tuesday that interest rate hikes will take some time to trickle down to the economy before inflation returns to an acceptable level.

The central bank official gave no forecast as to the direction he envisions policy, but said he does not expect inflation to return to the 2% target of the Fed before the next two years. If inflation doesn’t come down, he said the Fed still has the option of raising rates.

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He added that unemployment is expected to reach a range of 4% to 4.5%, from its current 54-year low of 3.4%.

“Because of the time lag between political actions and their effects, it will take time for [Federal Open Market Committee’s] measures to restore balance to the economy and bring inflation back to our 2% target,” Williams said in a prepared speech to the Economic Club of New York.

Williams spoke six days after the FOMC voted to raise its benchmark rate another quarter of a percentage point to a target range of 5% to 5.25%. In its post-meeting statement, the committee hinted it may halt rate hikes, though it said officials would consider a variety of factors in determining how to proceed.

The committee removed a key phrase from the statement that had indicated further rate hikes would be appropriate. Williams said that decision now depends on what the incoming data says.

“First of all, we didn’t say we were done raising rates,” Williams told CNBC’s Sara Eisen during a Q&A after her speech. “We’re going to make sure we’re going to hit our targets and we’re going to assess what’s happening in our economy and make the decision based on that data.”

“I don’t see any reason in my baseline forecast to cut interest rates this year,” he said, adding that further rate hikes would be possible if the data doesn’t cooperate.

Current banking sector issues and their impact will factor into Williams’ policy outlook, he said.

“I will focus particularly on assessing changing credit conditions and their effects on the outlook for growth, jobs and inflation,” Williams said.

Among the positive signs cited by Williams are moderating long-term inflation expectations and a cooling in demand for labor that has warmed the labor market and put upward pressure on wages, which however, failed to keep up with the rising cost of living.

He also said clogged work chains, which have been a major contributor to inflation, have “improved significantly” over time.