Williams says longer-run federal funds rate likely 3.50%–3.75%

The federal funds rate is the Fed’s main policy rate — the overnight rate that ripples into mortgages, credit cards, business loans, and bond yields. So when John Williams talks about where that rate belongs in the long run, he is really talking about where “normal” monetary policy may have moved. And that matters because markets have spent the last year arguing over whether the old pre-pandemic idea of neutral rates was simply too low. ### What did Williams actually say? Williams, who runs the New York Fed and is vice chair of the FOMC, said on May 4 that policy is “well positioned” for an economy facing elevated inflation, mixed labor-market signals, and uncertainty tied to higher energy prices and supply disruptions from the Middle East conflict. He did not announce a policy change. The Fed had already held its target range at 3.50% to 3.75% on April 29. The part markets care about is the implication. If the current setting is “well positioned” even with inflation still running hot, that sounds a lot less like “rates are clearly restrictive” and a lot more like “this may be closer to normal than people thought.” ### Why is 3.50%–3.75% such a big deal? Because that is not just some temporary emergency setting anymore. It is the current target range for the fed funds rate, and it is well above the world investors got used to in the 2010s. Back then, the whole debate centered on a much lower neutral rate — the policy level that neither stimulates nor slows the economy much. The latest official longer-run median from the Fed’s March 18 Summary of Economic Projections was 3.1%. So if investors hear Williams as saying something like 3.50% to 3.75% could be an appropriate longer-run neighborhood, that is a meaningful step above the Fed’s own published median estimate. ### Wait — what is the “neutral” rate? Basically, it is the policy rate that leaves the economy cruising rather than braking or accelerating. Economists call it r-star. The catch is that you cannot observe it directly. You infer it from inflation, growth, hiring, wages, financial conditions, and a lot of judgment. That is why small changes in language matter so much. If Fed officials start sounding comfortable with a higher resting place for rates, markets reprice everything built on the assumption that rates would drift back toward the old floor. ### Why are they even thinking higher? Inflation is the simple answer. The PCE price index rose 3.5% year over year in March 2026, up from 2.8% in February. Williams also said tariffs and energy prices added about 1 percentage point to that figure, and he expects inflation to stay above 2% for the next few quarters. So the old story — inflation cools, the Fed cuts, and policy glides back to a low neutral rate — looks shakier. If inflation proves more persistent, then the rate needed to keep price pressure contained may also be higher. ### Does this mean the Fed is hiking again? Not necessarily. Williams also said rates would need to come down “at some point” if inflation returns to 2%. But he was clear that higher inflation has pushed back the timing for cuts. In other words — the direction over the very long run could still be lower than today, but the destination may not be as low as markets once assumed. ### Who feels this first? Long-duration assets. That means tech stocks with profits far in the future, long-dated Treasurys, growth-heavy equity sectors, and rate-sensitive corners of housing and commercial real estate. A higher long-run policy rate raises discount rates — basically, future cash flows are worth less today. Banks, savers, and short-duration fixed income can handle that world better. Borrowers and anything priced off the hope of very cheap money do worse. ### So what is the real takeaway? The story is not “Williams promised higher rates forever.” It is narrower, but still important. He signaled that the Fed is comfortable sitting at 3.50% to 3.75% for now while inflation is still elevated, and that weakens the market’s old assumption that normal policy automatically means a return to near-zero-era thinking. The bottom line is that “higher for longer” may be turning into “higher even in normal times.”