Fed Williams sitting on the fence on inflation, but says persistent above target
At a Glance
Lead — The desk interprets John Williams' recent remarks as a signal of cautious optimism regarding inflation, with longer-term expectations remaining stable despite near-term pressures. Per the full note source, Williams emphasized that the labour market is not currently a source of inflationary pressure, which supports the Fed's current stance of watchful patience. This aligns with our consensus target of 1.075 for the USD/EUR pair, as traders await clearer signals from the Fed. The upcoming economic data releases may provide further clarity on inflation trends.
Key Takeaways
- 01Williams signals cautious optimism on inflation
- 02Labour market stability reduces inflationary pressures
- 03Long-term inflation expectations remain anchored
- 04Energy price uncertainty poses risks to the outlook
Full Analysis
What the desk is arguing
The desk frames Williams' comments as indicative of a Fed that is neither hawkish nor dovish, suggesting a stable outlook for inflation in the medium term. Williams highlighted that while near-term inflation expectations have risen, longer-term expectations remain anchored, which is crucial for maintaining market confidence.
Supporting this view, Williams noted that the labour market is stabilizing, described as neither tight nor in decline, which reduces the risk of wage-driven inflation. He also pointed out that tariff effects have largely passed through the economy without significant second-round impacts, further reinforcing the Fed's current policy stance.
Where it sits in our coverage
Our consensus target for the USD/EUR pair is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which shares a similar outlook on inflation, while bofa presents a more cautious stance at the lower end of the range. The desk's call sits at the upper bound of the spread, reflecting a more optimistic view on inflation stability.
How other firms see it
Firms like jpmorgan and citi are aligned in their assessment of stable long-term inflation expectations, while bofa and goldman sachs express concerns about potential inflationary pressures from energy prices and supply chain issues.
Traders should keep an eye on the USD/EUR trajectory, which could be influenced by upcoming Fed communications and inflation indicators, particularly the CPI data releases.
What the calendar says
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Market Implications
Watch for the USD/EUR pair to test levels around 1.075, particularly as upcoming inflation data could influence market sentiment. The Fed's next communications will be critical in shaping trader expectations.
From the original
Fed's Williams says longer-term inflation expectations are stable and the labour market is not driving price pressures, but flagged energy uncertainty and supply chain stress as key risks. Summary: Remarks by New York Fed President John Williams on May 14: Near-term inflation exp
Related speeches
4 itemsWilliams: Fed well positioned but energy price surge could prove worse than markets expect
The desk interprets New York Fed President John Williams' recent comments as a significant warning about the complacency in energy markets, suggesting that traders may be underestimating the risks of a supply shock from the Middle East. Per the full note [source], Williams indicated that inflation is likely to remain around 3% this year, with economic growth projected between 2% and 2.25%. This outlook, combined with the Fed's current policy stance, suggests that any escalation in energy prices could complicate the Fed's path forward, particularly as dissent among regional Fed presidents indicates a fragile consensus on easing. The market's pricing of rate cuts into 2026 may not adequately reflect the potential for persistent inflation driven by energy costs.