Fed's Williams says time has arrived to start rate cuts

© Reuters. FILE PHOTO: New York Federal Reserve Bank President John Williams speaks to Economic Club of New York, in New York City, U.S., May 30, 2024. REUTERS/Andrew Kelly/File Photo

By Michael S. Derby

NEW YORK (Reuters) -Federal Reserve Bank of New York President John Williams said on Friday a more evenly balanced economy has opened the door to central bank rate cuts, with the full course of action to be determined by how the economy performs.

“With the economy now in equipoise and inflation on a path to 2%, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate,” Williams said in a speech delivered before a gathering held at the Council on Foreign Relations in New York. “The stance of monetary policy can be moved to a more neutral setting over time depending on the evolution of the data, the outlook, and the risks to achieving our objectives,” he said.

But Williams was unwilling to weigh in on the specifics of the cadence and magnitude of the looming easing effort, and in term of how big the first rate cut might be later this month, telling reporters “that’s not something I have a personal view on right now."

More broadly, Williams noted “it’s pretty clear we're going to need over time to get interest rates back to a more normal level. The problem with that statement is I’m not sure what that more normal level is and I’m not sure at all about how long that should take."

The central banker spoke immediately after the release of August jobs data, which showed a 142,000 payrolls gain and 4.2% jobless rate following July's 4.3%. The movement of the jobless rate had been closely watched given its recent gradual drift upwards and unexpected July increase, which had raised fears that what had been a strong rate of hiring in the U.S. economy was running out of gas.

Williams said what's happening in the jobs market is consistent with what he sees as a cooling labor sector and a slowing economy. He also said in his formal remarks that the rise in the jobless rate largely represents a retreat from overheated conditions, and that it remains historically low. He said the jobless rate will likely end the year around 4.25% and then move back down to its longer-run level of around 3.75%.

The state of the job market has loomed into greater prominence for the Fed in a climate where inflation pressures have been easing enough to open the door to rate cuts starting in September. At the end of August, Fed Chair Jerome Powell said “the time has come for policy to adjust,” adding “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Over recent weeks, Fed officials have refrained from providing firm guidance over the size of the almost certain cut to come at the Federal Open Market Committee meeting scheduled for Sept. 17-18. Financial markets broadly expect a 25 or 50 basis point cut in what is now a 5.25% to 5.5% federal funds rate target, with more reductions coming after that.

A number of Fed officials have said they see a gradual path of easing but have been mum on what might happen at any given meeting. “I think a slow, methodical approach down is the right way to go,” Philadelphia Fed President Patrick Harker told Reuters on Aug. 22.

Williams also said in his speech that falling inflation pressures are likely to see inflation ease to 2.25% this year and to just above 2% next year.

The New York Fed president also said in his remarks that the Fed's ongoing shrinkage of its holdings of Treasury and mortgage bonds commonly referred to as quantitative tightening isn't having much influence on the economy largely because markets have already priced in the process.