(Bloomberg) — New York Federal Reserve President John Williams said progress in containing inflation and a cooling labor market would make it appropriate for the central bank to cut interest rates.
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Williams said “significant progress” has been made toward achieving the Fed’s twin goals of price stability and maximum employment, and that the risks to achieving both have moved to “balance.”
“With the economy in balance and inflation on track toward 2 percent, it would be appropriate to lessen the tightness of our policy stance by lowering the target range for the federal funds rate,” Williams said in remarks prepared for an event hosted by the Council on Foreign Relations in New York on Friday.
The latest data released Friday showed U.S. employers added 142,000 jobs in August, down from 89,000 the previous month. The unemployment rate fell to 4.2%.
During a moderated discussion after his speech, Williams said he wanted to review the data in more detail, but noted the latest numbers were “consistent with what we’ve seen thus far, which is a slowing economy and a cooling labor market.”
Williams told reporters afterward that the jobs report confirmed the weakness in the labor market. He said he didn’t yet have a view on whether the Fed should cut interest rates by a quarter or a half percentage point.
The Federal Reserve is widely expected to begin cutting its key interest rate from its 20-year high when it next meets in Washington on Sept. 17 and 18. Chairman Jerome Powell made it clear last month that the Fed does not want or welcome a further cooling in the labor market.
Officials have stressed in recent weeks that they are paying close attention to the employment situation after years in which inflation was their main focus, while price pressures continue to weaken.
The New York Fed president said he is increasingly confident that inflation is rising sustainably toward the central bank’s 2% target, adding that the labor market is unlikely to be a source of price pressure going forward.
“The risks to our twin objectives are now more balanced and policy needs to be adjusted to reflect that balance,” Williams said, characterizing the decline in inflation as broad-based and clear in the data.
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Potential risks
Williams said the bank was paying close attention to potential changes in economic conditions, including a “further significant weakening” in the labor market, the knock-on effects of a sharp slowdown in the global economy, and lingering inflation risks.
Williams said he expects the Fed’s key inflation measure to stabilize at around 2.25 percent this year and approach 2 percent next year.
With rate cuts almost certain to begin this month, the key questions for the Fed are how big the cuts will be, and the pace and size of any subsequent cuts.
Williams did not say how big the central bank’s initial rate cuts would be, but said authorities could move policy toward neutral – neither promoting nor restricting economic activity – “over time, depending on evolving data, the outlook and risks to achieving our targets.”
Chairman Powell similarly said last month that “the timing and pace of any rate cuts will depend on upcoming data, the evolving outlook, and the balance of risks.”
“There’s no general rule that says we should move slowly or we should move quickly,” Williams told reporters, adding that it would depend on the economic situation.
“It’s clear that we’re going to have to work over time to get interest rates back to a more normal level,” he said. “The problem with that statement is I’m not really sure what that more normal level is, and I have no idea how long it will take, because it depends on how the economy performs.”
Balance Sheet
The Fed is also reducing the size of its assets, which Williams said is going “well and on track.”
He said he believes much of the impact of the balance sheet reduction is already priced into the market and into long-term bond yields.
“The fact that we are reducing our balance sheet in no way impedes our ability to achieve our policy objectives,” Williams said.
(Adds additional comments from Williams during the moderated discussion and conversation with reporters.)
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