• Federal Reserve Vice Chair John Williams emphasizes the central bank still has "a ways to go" to reach its 2% inflation target
  • The Fed recently lowered the federal funds rate by 0.25 percentage points to 4-4.25% but remains vigilant on inflation
  • The central bank has shifted from flexible average inflation targeting back to a direct 2% goal without averaging

Federal Reserve Vice Chair John Williams reiterated Thursday that the central bank still faces significant challenges in returning inflation to its 2% target, despite recent policy adjustments and moderating economic growth.

"We have a ways to go to achieve our 2% inflation goal," Williams said, highlighting persistent above-target inflation that continues to challenge policymakers. His comments come just weeks after the Federal Open Market Committee lowered the federal funds rate by 0.25 percentage points to 4-4.25% in response to an evolving risk profile.

The Fed's latest policy shift reflects what officials describe as a "cautious approach" to balancing inflation concerns against signs of economic softening. While growth has slowed and unemployment has increased slightly, inflation remains elevated, according to people familiar with the matter.

Recent framework changes have seen the Fed abandon its flexible average inflation targeting approach, which previously allowed for periods of above-2% inflation. The central bank has now returned to a more traditional inflation targeting regime with a clear long-term focus on 2%.

Professional forecasts suggest the path to 2% inflation may be gradual, with CPI inflation projected to average around 2.3% annually through 2034. This slow descent underscores Williams' point that the Fed's work on inflation is far from complete.

"The new approach emphasizes flexible inflation targeting with a clear long-term focus on 2%," one source close to the discussions said, noting that the shift reflects lessons learned from the unexpectedly high post-pandemic inflation.

The FOMC's recent decision wasn't unanimous, with some members reportedly favoring a larger rate cut at the last meeting. This internal debate highlights the delicate balancing act the Fed faces as it navigates competing economic signals.

Efforts to reach representatives from the Federal Reserve for additional comment were unsuccessful Thursday afternoon. Market participants will be closely watching upcoming economic data releases for signs of whether inflation is responding to the Fed's current policy stance.

Correction: An earlier version of this article misstated the timeline for the Fed's policy framework review. The shift from flexible average inflation targeting occurred in 2025.