Fed's Williams Sees No Urgency; October Hike Odds 50-50

New York Fed's Williams said there is no need for urgency on another fed rate hike, cutting October odds to 50-50 and lowering two-year Treasury yields.

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New York Fed President John Williams said on Tuesday, September 29, that policymakers have time to gather more information before deciding on another fed rate increase. Traders cut the probability of a quarter-point move at the October meeting to roughly 50-50, from nearly 70% earlier in the session. Short-dated Treasury yields moved lower on the repricing.

Speaking at the University at Buffalo, Williams said: "With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information." He added that one further upward adjustment of the federal funds target range may be appropriate late this year if the economy evolves as expected, to support a timelier return of inflation to target.

What Did Williams Say About the Next Rate Hike?

Williams said the September increase gives the Fed room to wait, while keeping one more hike in his baseline. The Federal Open Market Committee voted unanimously on September 16 to raise the target range by 25 basis points to 3.75%-4.00%. That was the first increase since July 2023. The median projection in the September dot plot pointed to one additional quarter-point hike in 2026.

Williams said it is imperative to return inflation to the 2% target on a sustained basis. He projected 12-month inflation of about 3.5% by year-end, from 3.7% through August, with a return to 2% not expected until 2028. His phrase "late this year" is read by markets as pointing to the December meeting rather than October.

Why Did Markets React This Way?

Markets reacted because the remarks removed much of the urgency that had been priced into October. Futures had assigned close to a 70% chance to an October increase before Williams spoke. Pricing now favors a single hike in 2026, most likely at the mid-December meeting.

The two-year Treasury yield, the tenor most sensitive to expected interest rates, fell 3.51 basis points to 4.889%, after touching 4.9596% earlier in the session. The move reflects a lower expected policy path over the next several months.

Longer maturities did not follow. The 10-year yield ended near 5.255%, up 1.3 basis points, after reaching 5.2932%. The 30-year yield rose about 3 basis points to 5.592%, having touched 5.613%, its highest level since June 2002. Front-end relief and back-end pressure left the curve steeper, a sign that concerns over inflation persistence and long-term supply are being priced separately from the near-term policy path.

How Did Equities Respond?

Equities ended slightly lower as long-dated yields stayed elevated. The Dow Jones Industrial Average fell 131.59 points, or 0.26%, to 51,349.92. The S&P 500 slipped 12.85 points, or 0.17%, to 7,670.84, and the Nasdaq Composite lost 22.84 points, or 0.08%, to 26,797.54. Higher oil prices tied to geopolitical tensions and questions over the AI trade after a leaked prospectus for a planned Anthropic public offering also weighed on sentiment.

What Are Other Fed Officials Signaling?

Other officials have stressed the inflation risk. Chicago Fed President Austan Goolsbee has highlighted the persistence of price pressures. Governor Michael Barr has advocated further policy adjustments. St. Louis Fed President Alberto Musalem has emphasized the importance of clear central bank communication. Williams is vice chair of the FOMC and his remarks are typically read as close to the committee's center of gravity, which is why the market repriced quickly.

What Comes Next for the Fed and Treasury Yields?

The next tests are the incoming inflation and labor data ahead of the October meeting. A firm inflation reading would restore pressure for an earlier move, while softer data would strengthen the case for holding until December. The gap between falling short-term yields and record-high long-term yields also remains a focus, since it shows how far the front end of the curve is tied to Fed guidance while the long end responds to inflation risk and term premium.

Outlook

Williams has moved the base case from October to December without dropping the tightening bias. The Fed is at 3.75%-4.00% with one more quarter-point hike in its projections, and traders now treat October as a coin flip. Short-term yields will track each data release, while the 30-year yield near 5.6% keeps the pressure on longer-term borrowing costs.