Fed's Williams keeps alive rate hike chance if inflation doesn't retreat

By Michael S. Derby

NEW YORK (Reuters) - Federal Reserve Bank of New York President John Williams said on Thursday that the U.S. central bank is likely done with interest rate hikes, but he added that rates could rise again if inflation pressures do not continue to moderate.

"The future remains highly uncertain, and our decisions will continue to be data-dependent," Williams said in the text of a speech to be given at a conference at his regional bank. The risks for the economy are currently two-sided between too high inflation and a weaker economy, and "in balancing these risks, and based on what I know now, my assessment is that we are at, or near, the peak level of the target range of the federal funds rate."

Williams said he would continue to watch incoming data, but noted "if price pressures and imbalances persist more than I expect, additional policy firming may be needed."

Williams spoke as Fed officials are about to enter their customary blackout period where they refrain from public comment on monetary policy issues ahead of a rate-setting meeting. The central bank’s Federal Open Market Committee meeting is scheduled for Dec. 12-13.

Over recent days officials have sent strong hints that they will meet market expectations and hold steady their overnight target rate range at between 5.25% and 5.5%. Fed officials have acknowledged a notable cooling in inflation pressures coupled with the still-ongoing impact of past rate hikes as a reason why they can hold steady for now and take in more data before deciding what to do next with rates.

Many market participants believe the Fed is done with rate increases and are already pricing in rate cuts starting next year as inflation pressures abate further, but Fed officials have on balance been reluctant to talk of the prospect of easier policy with inflation still well above their 2% target.

On Thursday, the government reported more progress on the inflation front. The October personal consumption expenditures price index was up 3% from a year ago, down from the 3.4% year-over-year increase seen the month before. Stripped of volatile food and energy factors the index was up 3.5%, from the 3.7% increase seen in September.

In his remarks, Williams said that he expects inflation pressures to moderate to 3% for this year, ebbing to 2.25% for next year, and "closing in" on the 2% target by 2025. Williams said he sees growth moderating to 1.25% next year, with unemployment rising to 4.25%.

Williams said monetary policy is at its most restrictive stance in a quarter century, and he said tighter monetary policy has contributed to making financial conditions more restrictive of growth.

(Reporting by Michael S. Derby; Editing by Paul Simao and Andrea Ricci)