Williams indicates that inflation will reach 3% in the first half of the year, and expectations of rate cuts have cooled again.

Federal Reserve New York President Williams has sent an important signal: inflation is expected to peak at 2.75%-3% in the first half of 2026. This is not an isolated statement but occurs against the backdrop of intensive remarks from Fed officials and the upcoming December CPI data, as the market re-evaluates the pace of rate cuts. Meanwhile, Williams also pointed out that the risks to employment are rising, reflecting a policy dilemma faced by the Fed: inflation has not been fully tamed, yet employment is showing signs of fatigue.

The Real Implications of Inflation Expectations

Williams’ forecast of a peak inflation rate of 2.75%-3% still falls short of the Fed’s 2% target. What does this mean?

First, although inflation is trending downward, the pace of decline may be slower than the market expects. If inflation only peaks in the first half of the year, the average inflation level for the entire year will remain relatively high, directly threatening further rate cuts by the Fed.

Second, this expectation deviates from the market’s previous optimism that inflation would fall quickly, providing the Fed with more room to cut rates. But Williams’ remarks indicate that the Fed’s internal view on inflation stickiness is more cautious.

Rising Risks to Employment and Policy Signals

What’s more noteworthy is Williams’ mention of “rising downside risks to employment.” This marks a key policy turning point:

• Shift in risk assessment: from focusing on inflation risks to employment risks, indicating a change in the Fed’s policy focus
• Pressure on rate cut timing: if employment deteriorates, the Fed may be forced to cut rates to stabilize employment, but persistent inflation will constrain the magnitude of cuts
• Policy dilemma: this is an early sign of stagflation expectations—slowing economic growth coupled with stubborn inflation

Market Expectations Revisited

According to recent information, Fed officials will be speaking intensively this week, including speakers like Bostic, Barkin, and Musialem, who will deliver speeches in succession. The market generally expects these speeches to collectively signal a hawkish stance, further dampening previous expectations of a 50-75 basis point rate cut in 2026.

Chain Reaction in the Cryptocurrency Market

This series of signals will have a clear impact pathway on the crypto market:

• Continued strength of the dollar: Diminished rate cut expectations mean interest rates remain high, keeping the dollar index strong, which directly suppresses the performance of Bitcoin and other dollar-denominated assets
• Pressure on risk assets: Reduced rate cut expectations generally decrease the attractiveness of risk assets, including cryptocurrencies
• Potential for increased volatility: CPI data and Fed officials’ speeches may trigger sharp market swings, a period traders should be cautious of

It’s worth noting that gold and silver performed strongly this week (gold rose over 4%), partly reflecting safe-haven demand amid geopolitical risks, but also indicating a more cautious market attitude toward Fed policy.

Summary

Williams’ remarks essentially reflect the Fed’s updated understanding of the economic situation: limited room for inflation to decline further, and rising employment risks. This suggests that the rate cut window in 2026 may be much smaller than previously expected, and the dollar will continue to be supported. For the crypto market, the short-term challenge is the continued cooling of rate cut expectations. Close attention should be paid to December CPI data and the speeches of Fed officials this week, as these will directly influence market direction in mid-January.