Williams sees another rate hike this year as 'reasonable', flags inflation as key hurdle

Williams is providing a fairly clear-cut view of the US economy and where monetary policy is headed. Here are his main points:

• The US economy has displayed notable strength
• The risks to the downside for reaching full employment have become smaller
• Inflation is the primary challenge at the moment
• The Fed's goal is to bring inflation back to its target as soon as possible
• Another interest rate increase before year-end appears 'reasonable'
• The period of clear and direct forward guidance is finished
• It is uncertain whether higher yields will remain persistent

The main point for me is how Williams is describing the risk balance. The Fed already raised rates by 25 basis points last week, to a range of 3.75% to 4.00%, and in its statement emphasised a 'timelier' path toward returning inflation to the 2% target. Williams' comments mainly echo that message.

The takeaway is that if policymakers are less concerned about a weakening job market, they have more leeway to continue pushing back against inflation.

That being said, he is still not outright saying another rate increase is guaranteed. His remark that the era of explicit forward guidance is over confirms that the Fed wants to keep its flexibility and options open.

Higher Treasury yields can assist the Fed in tightening financial conditions to some degree. However, policymakers will eventually need to act on their own — as demonstrated by last week's decision.

For now, his comments do align somewhat with how markets are adjusting the Fed outlook. The probability of an additional 25 basis point rate hike in October has risen to roughly 77%, and December pricing is beginning to consider a more aggressive move.