(Bloomberg) — Federal Reserve Bank of New York President John Williams said it is now appropriate for the central bank to reduce interest rates, given progress on lowering inflation and a cooling in the labor market.
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Williams said there had been “significant progress” toward the Fed’s dual goals of maintaining stable prices and maximum employment and that the risks to achieving both have moved into “equipoise,” or a state of equilibrium.
“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 Friday in a speech prepared for an event held by the Council on Foreign Relations in New York.
Fresh data out Friday showed US employers added 142,000 jobs in August, after a downwardly revised 89,000 in the prior month. The unemployment rate ticked lower to 4.2%.
While Williams said in a moderated discussion following his speech that he’d like to look at the data more closely, he noted the latest figures are “consistent with what we’ve been seeing — a slowing economy and a cooling off in the labor market.”
Williams later told reporters the job numbers reinforce the cooling seen in the labor market. He said he doesn’t yet have a view on whether the Fed should lower interest rates by a quarter point or half point.
The Fed is widely expected to begin lowering its key interest rate from a two-decade high when policymakers next meet Sept. 17-18 in Washington. Chair Jerome Powell made clear last month that the central bank does not seek or welcome a further cooling in the labor market.
Officials have emphasized in recent weeks that they are paying close attention to the employment landscape after a yearslong stretch when inflation had been their primary focus. Price pressures, meanwhile, have continued to abate.
The New York Fed chief said he’s more confident inflation is moving sustainably toward the central bank’s 2% goal, adding that it’s unlikely the labor market will be a source of price pressures going forward.
“The risks to our two goals are now in better balance, and policy needs to adjust to reflect that balance,” said Williams, who characterized the downward movement in inflation as broad-based and clear in the data.
Potential Risks
Williams did note he is attentive to potential shifts in economic conditions, including a “significant further weakening” in the labor market, spillover from a sharp slowdown in global growth and lingering inflation risks.
Williams said he sees the Fed’s preferred inflation gauge moderating to around 2.25% this year and to be near 2% next year.
With the start of rate cuts this month all but guaranteed, a key question for the Fed is how large the reduction might be and what the pace and size of cuts will be thereafter.
While Williams didn’t offer insight into the size of the central bank’s first rate reduction, he said officials can move policy toward neutral — a stance intended to neither promote or restrict economic activity — “over time depending on the evolution of the data, the outlook and the risks to achieving our objectives.”
Powell similarly said last month that “the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
Williams said in his comments to reporters, “there is not a general principal of you should be gradual, or you should move fast,” adding it depends on the state of the economy.
“It’s clear we are going to need over time to get interest rates back to more normal level,” he said. “The problem with that statement is I’m not sure what that more normal level is, and I am not sure at all about how long that should take, because it will be driven by how the economy evolves.”
Balance Sheet
The Fed has also been reducing the size of its asset holdings, a process Williams said had been going “smoothly and as planned.”
He said be believes much of the effects of that balance-sheet runoff are already built into the market and long-term bond yields.
“The fact that we’re shrinking the balance sheet is not in any way interfering with our ability to achieve our policy goals,” Williams said.
(Adds additional comments from Williams from moderated discussion and conversation with reporters.)
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