New York Federal Reserve President John Williams said one more rate increase this year may be an appropriate move to help contain inflation, though he added that after the Fed's rate hike earlier this month, there is no rush to act for now.

In prepared remarks for an event in Buffalo, New York on Tuesday, Williams said: "If the economy evolves broadly in line with my forecast, a further rate increase later this year could be appropriate, which would help bring inflation back to target in a more timely manner."

Fed officials raised rates in September for the first time in 2023. Williams said that action gave the Fed time to gather more data and thereby judge the economic outlook more clearly. He said, "After the policy action we took at our September meeting, there is no need to hurry, and we have time to gather more information."

After Williams spoke, pricing based on federal funds futures contracts showed investors cut the probability of a Fed rate increase at the October 27-28 meeting to about 50% from around 70%.

Urgency of Rate Hikes

Williams also noted on Tuesday that Middle East conflict and AI-related construction investment remain major drivers of rising inflation. On the other hand, tariffs are no longer a factor pushing inflation higher.

"The inflationary impact of the demand shock related to AI is becoming more prominent, and I now expect the effect of energy prices on inflation to be larger and longer-lasting," he said. "However, there is currently no evidence that these factors are spreading into broader and more persistent price pressures."

Several Fed officials had previously warned that further monetary tightening is still necessary. The latest economic projections released by the Fed after its rate decision showed most policymakers expect another 25 basis point rate hike this year, while eight others expect a similar-sized increase in 2027.

Williams said that as the economy shows resilience and the labor market remains solid, inflation risks have risen.

"Although monetary policy cannot move ships or restart pipelines and refineries, it can reduce the risk that these supply shocks spread into broader and more persistent inflation," he said.

Williams expects inflation to be 3.5% this year and to slow in 2027 to slightly above the Fed's 2% target. He believes the Fed should be able to achieve its inflation target in 2028.

Earlier on Tuesday, Chicago Fed President Austan Goolsbee reiterated that if supply shocks persist, the Fed may need to respond by raising rates. Normally, central banks do not adjust rates in response to supply shocks because their inflationary effects are often temporary. But Goolsbee said: "The tricky reality is that if we start to encounter permanent or very long-lasting supply shocks, I think the Fed must consider responding to these persistent shocks in order to maintain credibility."

Fed Governor Michael Barr, who also spoke on Tuesday, again warned that further rate increases may still be needed to bring inflation down. In prepared remarks for an event in Detroit, Barr said: "Under my baseline forecast, the Fed may need to further adjust policy to ensure inflation falls back to target in a timely manner. At present, I have not seen a clear trend of inflation returning to 2% in a timely manner."