Fed Williams sitting on the fence on inflation, but says persistent above target
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.
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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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
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.
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 expectations have risen, but longer-term expectations remain stable and the Fed is not seeing signs of broader expectation problems Tariff effects appear to have largely passed through the economy, with no major second-round inflation impact observed so far The labour market is neither tight nor slowing sharply, and is not seen as a source of inflation pressure Emerging supply chain pressures and a highly uncertain energy price outlook are flagged as key risks Williams stressed that context matters when assessing inflation persistence above target Fed independence was defended as delivering better economic outcomes, with staff said to be focused on the central bank's core mission Federal Reserve Bank of New York President John Williams offered a carefully balanced assessment of the US economy on Thursday, signalling that while inflation risks have not disappeared, the conditions for a policy move in either direction are not yet in place. At the centre of Williams' remarks was the relationship between inflation and the labour market.
He was clear that the job market is not a source of current inflationary pressure, describing it as neither tight nor in sharp decline. The labour market, in his view, has been showing signs of stabilisation, sitting in a state that is not hot but also not deteriorating in any meaningful way. That assessment matters because a slack labour market reduces the risk that wage growth feeds through into sustained price increases, one of the key channels through which inflation can become entrenched.
On inflation itself, Williams acknowledged that near-term expectations have moved higher, a development he said was not surprising given the current environment. But he was at pains to stress that longer-term inflation expectations remain stable, and that the Fed is not yet seeing evidence of significant second-round effects, where initial price rises feed into broader wage and price-setting behaviour. Tariff pressures, he added, appear to have largely worked their way through the economy already.
That relatively contained picture was tempered by two areas of concern. Williams pointed to emerging supply chain pressures as a developing issue, and was candid about the high degree of uncertainty surrounding the energy price outlook, a factor with the potential to shift the inflation trajectory materially in either direction. Context, he noted, matters when assessing how to interpret inflation running persistently above target.
The overall tone was one of watchful patience. Williams gave no indication that the Fed is preparing to move rates soon, nor did he close the door on action if conditions shift. With energy uncertainty unresolved and supply chains showing early stress, the Fed appears content to hold its position and monitor the data. --- Williams' assessment that longer-term inflation expectations remain anchored will offer some comfort to bond markets, though his caution on energy price uncertainty keeps the rate outlook murky.
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