Fed's Williams not swayed that a rate hike is the answer yet

• Key takeaway: Federal Reserve Bank of New York President John Williams said there is no "unusual" broadening of the effects of higher energy prices and that inflation expectations remain well anchored, suggesting a "wait-and-see" approach is appropriate. 
• Expert quote: "I am actually seeing the trend in inflation moving slowly down as some of the effects of the tariffs kind of move into the rearview mirror. But we have to be data dependent. Have to keep watching that data." — Federal Reserve Bank of New York President John Williams
• What's at stake: The Federal Open Market Committee's next meeting is scheduled for Sept. 15-16, and a majority of market participants believe the central bank will raise interest rates by 25 basis points. 

A key member of the Federal Reserve's monetary policy committee said he is not convinced that the central bank should be cutting interest rates just yet.

Federal Reserve Bank of New York President John Williams speaking on CNBC Wednesday said the central bank has to "wait and see" before making any adjustments to monetary policy.

"There's no clear science right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether we would need to see further action to do that," said Williams.

The federal funds rate is currently at 3.5% to 3.75%.

Williams — who, as New York Fed president, is a permanent member of the Federal Open Market Committee, the Fed's interest rate-setting body — noted that tariffs and a sharp rise in energy prices related to the war with Iran have spilled over into core inflation. However, he said he expects inflation to eventually return to the Federal Reserve's 2% target.

"When I think about inflation today, it is important to disaggregate the data, look at the different pieces, and think through that," he said. "So far, we're not seeing the second-round effects or broadening of the tariffs. We're not seeing unusual broadening of the effects of higher energy prices. We're seeing well-anchored inflation expectations and pretty contained compensation growth.

"I am actually seeing the trend in inflation moving slowly down as some of the effects of the tariffs kind of move into the rearview mirror," he added. "But we have to be data dependent; got to keep watching that data."

Since the last FOMC meeting, several economic reports have been released, complicating the outlook on the economy. Inflation was little changed in July and the labor market lost jobs, though the unemployment rate ticked down as fewer people entered the workforce.

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Financial markets have favored a rate hike since Fed Chair Kevin Warsh's speech last week at the Jackson Hole Symposium, which was viewed by analysts and observers as striking a staunchly anti-inflationary tone. But reading the tea leaves of what the FOMC will actually do is unclear, with policymakers appearing to be divided over the path forward. In a speech Tuesday, Fed Gov. Michael Barr said he is open to either hiking interest rates at this month's FOMC meeting or holding them steady, depending on what the data calls for.

Meanwhile, Federal Reserve Bank of Cleveland President Beth Hammack — one of the three dissenters at the last FOMC meeting — reaffirmed her belief that inflation should be dealt with sooner rather than later.

"I don't want to prejudge anything. But I believe now is the time to act," Hammack said. "I believe that we've been in an inflationary situation for more than five years. It's been running well above our target. I don't see any restriction in policy when I look at financial conditions and when I talk to market participants."

Federal Reserve Bank of Dallas President Lorie Logan and Federal Reserve Bank of Minneapolis President Neel Kashkari also voted for a hike in July. Nonvoting FOMC members Jeffrey Schmid and Alberto Musalem, heads of the Kansas City Fed and St. Louis Fed, respectively, also have come out in favor of a hike.