Fed’s Williams Indicates It’s Time to Begin Rate Cuts, by Reuters

By Michael S. Derby

NEW YORK – Federal Reserve Bank of New York President John Williams indicated on Friday that a more balanced economy has paved the way for potential rate cuts by the central bank, with future actions dependent on economic performance.

“With the economy now in equilibrium and inflation trending towards 2%, it is appropriate to reduce the degree of restrictiveness in our policy stance by lowering the target range for the federal funds rate,” Williams stated during a speech at a gathering in New York. He added that monetary policy could gradually shift to a more neutral position as data evolves, along with the outlook and associated risks.

However, Williams refrained from commenting on the specifics regarding the timing and scale of impending rate cuts, stating to reporters, “that’s not something I have a personal view on right now.”

He noted, “It’s pretty clear that over time, we’ll need to adjust interest rates back to a more normal level. The challenge is that I’m uncertain about what that normal level actually is and how long the process should take.”

Williams spoke shortly after the release of August employment data, which revealed a payroll gain of 142,000 and a drop in the unemployment rate to 4.2% from July’s 4.3%. The slight increase in the jobless rate had generated attention, as it suggested a potential slowdown in the previously robust employment growth in the U.S. economy.

Reflecting on the job market, Williams described the current conditions as indicative of a cooling labor sector and a decelerating economy. He suggested that the uptick in the unemployment rate signifies a shift away from overheated conditions and remains historically low. He anticipates the jobless rate will finish the year around 4.25% before returning to its longer-term level of approximately 3.75%.

The status of the job market has gained prominence for the Federal Reserve amid waning inflation pressures, which have opened the possibility for rate cuts beginning in September. In late August, Fed Chair Jerome Powell remarked that “the time has come for policy to adjust,” emphasizing that the timing and scale of any rate reductions will rely on incoming data and evolving economic conditions.

In recent weeks, Fed officials have avoided providing concrete guidance regarding the anticipated cut at the upcoming Federal Open Market Committee meeting scheduled for September 17-18. Financial markets generally expect a cut of either 25 or 50 basis points from the current federal funds rate target of 5.25% to 5.5%, with further reductions likely to follow.

Several Fed officials have expressed support for a gradual easing approach but have remained noncommittal regarding specific actions at any meeting. “I think a slow, methodical approach down is the right way to go,” stated Philadelphia Fed President Patrick Harker.

Williams also noted in his speech that declining inflationary pressures are projected to bring inflation down to 2.25% this year and slightly above 2% the following year.

Additionally, he commented that the Fed’s ongoing reduction of its Treasury and mortgage bond holdings, commonly referred to as quantitative tightening, is not significantly impacting the economy, as markets have largely anticipated this process.