Fed's John Williams says rates could hit 4.5% over time

The Federal Reserve may need to raise interest rates to "somewhere around 4.5% over time" to tamp down high inflation, New York Federal Reserve President John Williams warned Friday.

During a speech at SUNY Buffalo State College in Buffalo, New York, Williams made it clear that he thinks interest rates need to rise even further if the Fed is going to achieve its two primary goals of maximum employment and price stability.

"On maximum employment, things look very strong," Williams said. "But on price stability, we're a long way from what we need to be." 

The timing of lifting the benchmark rate to 4.5%, and the steepness of the rise, depends on the data.

"It's going to depend on what happens with inflation, employment, the global economy … and how quickly does the economy … respond to the higher interest rates," Williams said.

The U.S. central bank's Federal Open Market Committee, of which Williams is vice chair, has already raised its benchmark interest rate by 3 percentage points since March. In September it raised the rate by three-quarters of a percentage point to a target of 3% to 3.25%. That marked the third consecutive FOMC meeting that the Fed has raised its interest rate by 75 basis points, and it put the Fed's key interest rate at its highest level since 2008.

Williams's comments came during a two-day trip to western New York, where he met with government, business and community development leaders as part of the New York Fed's in-person visits to gauge the economic conditions of the Federal Reserve's Second District.

Williams said there are signs of a slowing economy — U.S. gross domestic product is shrinking and the housing market is cooling, for example — and while the labor market is strong, it soon might "not be as strong in terms of job growth" given "very high inflationary pressures," he said.

Employers added 263,000 nonfarm jobs in September, according to the Labor Department's latest monthly jobs report, which came out Friday. In August, employers added 315,000 jobs.

The Fed has been watching such numbers closely to see if the interest rate hikes are slowing job growth. 

Williams said he doesn't expect the economy to contract, even if interest rates tick upward.

"I do see positive growth next year in the economy," he said. "I do see the unemployment rate coming up somewhat, but most importantly I see inflation coming down pretty significantly next year as we see the prices of lots of goods and commodities come down."