Fed’s Williams Signals Support for Quarter-Point Interest Rate Cuts

A senior official at the Federal Reserve expressed optimism regarding the central bank’s ability to facilitate a soft landing for the U.S. economy. He suggested a more measured approach to potential rate cuts following September’s notable half-point reduction.

John Williams, president of the New York Fed, noted that the robust September jobs report indicated the ongoing strength of the U.S. economy, even as inflation has decreased after a prolonged period of high rates.

“The current stance of monetary policy is positioned well to hopefully maintain the strength we see in both the economy and the labor market while also encouraging inflation to return to 2%,” Williams stated in an interview.

Recent jobs data has eased recession fears that had intensified as the Fed increased borrowing costs in an effort to combat the highest inflation rates seen in decades. This data has also tempered anticipations for another half-point cut in rates for November, following the initial adjustment to a range of 4.75-5% in September.

As a voting member of the Federal Open Market Committee and an ally of Fed Chair Jerome Powell, Williams defended the decision to cut rates in September, arguing it was prudent both at that time and continues to be appropriate as inflation subsides and the labor market shows signs of cooling.

“It made sense, as the chair indicated, to recalibrate policy to a level that remains restrictive and continues to apply downward pressure on inflation, though to a lesser extent,” he commented. “I do not want to see the economy weaken. I aim to preserve the strength evident in both the economy and labor market.”

When addressing future rate cuts, Williams referred to the Fed’s “dot plot,” which suggests two quarter-point reductions in the remaining meetings of the year and called this a “very good base case.”

He emphasized that future decisions will be based on data rather than following a fixed trajectory. He clarified that the half-point cut in September should not be seen as a precedent for future actions.

Williams reiterated the objective of reaching a “neutral” interest rate setting, where rates no longer hinder demand. However, he acknowledged the difficulty in making precise predictions about where interest rates will ultimately land.

He stated that if inflation decreases more swiftly, there would be a need for faster policy normalization. Conversely, if inflation stagnates, any rate cuts would be slowed accordingly.