Everyone Thinks Interest Rates Will Fall, but This Fed Official Says They Can Still Go Higher

Hold on there, Wall Street. The Federal Reserve isn't even discussing reducing interest rates just yet – at least according to one key central bank policymaker.

“We aren’t really talking about rate cuts right now,” New York Fed President John Williams said in a CNBC interview on Friday. "It's just premature to be even thinking about that."

That was news to stock market investors who drove stocks to new highs this week. The Dow Jones Industrial Average set a record on Thursday following the Fed's decision on Wednesday to hold interest rates steady. Stocks, however, were pulling back slightly in Friday's trading.

While Fed policymakers left open the possibility of an additional hike if inflation doesn't return to their 2% target, they also forecast about 75 basis points worth of rate cuts for next year. And in a press conference, Fed Chairman Jerome Powell said rate cuts were "clearly a topic of discussion out in the world and also a discussion for us at our meeting today."

Markets have been betting on about a 70% chance of rate cuts by March, according to the CME FedWatch Tool, which is based on Fed funds futures trading. And Goldman Sachs has said it expects the Fed to cut rates five times next year, starting with a cut in March.

The central bank's interest rate hikes have been taking a toll on consumers all year with mortgage rates that had approached 8% and credit card rates hitting record highs.

Williams at least repeated his earlier statements that the Fed's rate-hiking cycle is nearing its peak.

"The base case is looking pretty good," he said. "Inflation is coming down, the economy remains strong and unemployment is low."

But another step-up in interest rates simply can't be ruled out, he said.

"One thing we've learned, even over the past year, is that the data can move in surprising ways," he said. "We need to be ready to move further if inflation, the progress of inflation were to stall or reverse."