High energy prices combined with AI demand: Fed's "third in command" says expectations of another rate hike before year-end are "reasonable"

As the Fed's "third in command" and New York Fed president with a permanent vote, Williams said there is still a great deal of work to do on inflation, given elevated energy prices and demand driven by artificial intelligence investment. Williams said the market's expectation of another rate hike before the end of the year "is a reasonable way to think about it, but we'll have to see how things go." He said the U.S. economy "has shown remarkable resilience despite major shocks," and the labor market is "solid." However, he noted that the ongoing U.S.-Iran war and "fairly strong demand coming from AI" pose lingering inflation risks. "This is our job: we still have a lot of work to do," he said Thursday at an event in London. "Inflation has been above target for five years." U.S. inflation held at 3.4% in August, above target, with a key gauge excluding food and energy rising more than expected from the previous month. Fed officials voted unanimously last week to raise the benchmark rate by 25 basis points to a range of 3.75%-4%. Fed Chair Kevin Warsh said the decision was intended to withdraw "a dose of accommodation" from the economy to bring inflation back down to the central bank's 2% target. Since then, several policymakers have argued that higher rates may be needed. According to the Fed's latest economic projections, most officials expect one more 25-basis-point hike this year. Williams sounded fairly optimistic about the prospect of an AI-driven productivity boom, though he warned that if the technology is dominated by a handful of large companies, its gains may not be shared equally. "As AI investment proceeds, I expect productivity growth to pick up in the coming years," he said. While the productivity gains could reach levels seen before the financial crisis, Williams added that AI is currently only a small factor. On the neutral ratethe level at which policy neither weighs on nor boosts inflationWilliams said there is a "tug of war" between fiscal policy and stronger economic growth on one side, and factors such as demographics that push the measure lower on the other.