New York Fed President Williams said on Thursday that market expectations for another rate hike before the end of the year are "reasonable," and characterized the artificial intelligence boom as a traditional demand shock, suggesting inflationary pressures may prove more resilient as a result.

Speaking at a conference hosted by NIESR in London, Williams noted that the market widely expects the Fed will need to tighten policy again before the end of this year, and "from my perspective, that view is reasonable." He also stressed that the Fed's main challenge remains inflation, which must be brought back to target in a timely manner.

Williams's remarks are consistent with signals released at the Fed's meeting last week. Under the leadership of new Chairman Warsh, the Fed raised its policy rate last week to a range of 3.75% to 4.00%, with 16 of 18 policymakers indicating that at least one more rate hike will be needed before the end of 2026. Williams is a core decision-maker in the Fed system second only to the chairman and vice chairman, and his remarks carry important reference value for the market.

Inflation Remains the Primary Challenge, Labor Market Concerns Ease

Williams said the current U.S. economy is showing remarkable resilience, and the downside risks to achieving full employment have clearly diminished, giving the Fed room to focus its efforts on fighting inflation.

He noted that the Fed will continue gathering data over the coming months and will adopt the same prudent, meeting-by-meeting approach to decision-making as it did from July through September, rather than pre-committing to a path. "The era of providing clear and very direct forward guidance is over," he said, acknowledging that "no one knows whether high yields will persist."

These remarks mean the Fed has shifted its policy communication strategy from previously explicit guidance toward greater flexibility, and investors need to price in uncertainty around the rate path.

AI Boom Seen as a Demand Shock, Productivity Outlook Uncertain

On the topic of artificial intelligence, Williams offered a framework judgment with real market implications. He said AI is currently generating "fairly strong demand," and characterized the phenomenon more as a traditional demand shock rather than a pure supply-side productivity improvement.

He expects AI will ultimately bring a productivity boom, with an impact path potentially similar to the technology-driven growth cycle between 1996 and 2005, but the core question is "how long the chip supply challenge will last" and how long this boom can continue.

This characterization carries important monetary policy implications: if AI mainly manifests as a demand shock, then at a stage when supply has not yet responded fully, its upward push on inflation will be more direct, thereby supporting the case for the Fed to maintain a relatively tight monetary policy stance.