Federal Reserve Bank of New York President John Williams said Friday that a more balanced economy has opened the door to rate cuts, and that the full course of action will be determined by how the economy performs.
“Now that the economy is on an even keel and inflation is on track to 2 percent, it is appropriate to ease the tightening of the policy stance by lowering the target range for the federal funds rate,” Williams said in the text of a speech prepared for delivery at a meeting of the Council on Foreign Relations in New York.
“The monetary policy stance may shift to a more neutral setting over time depending on data developments, the outlook and risks to achieving our objectives,” he said.
The central banker spoke on the heels of the release of August jobs data. The unemployment rate movement had been closely watched given its recent gradual upward trend and the unexpected increase in July, which had raised fears that what had been a strong pace of hiring in the U.S. economy was running out of fuel.
In his speech, Williams said the rise in the unemployment rate largely represents a retreat from overheated conditions in the economy and remains historically low. He said the unemployment rate will likely end the year around 4.25% and then decline back to its long-run level of around 3.75%.
The state of the labor market has taken on added importance for the Fed in a climate in which inflationary pressures have eased enough to open the door to rate cuts as early as September. In late August, Fed Chair Jerome Powell said that “the time has come to tighten monetary policy,” adding that “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.”
In recent weeks, Federal Reserve officials have refrained from providing firm guidance on the size of the cut that is almost certain to come at the Federal Open Market Committee meeting scheduled for Sept. 17-18. Financial markets broadly expect a cut of about a quarter of a percentage point in what is now a 5.25% federal funds rate target to 5.5%, and further cuts after that.
Several Fed officials have said they envision a gradual path to easing, but have been tight-lipped about what might happen at any given meeting. “I think a slow, methodical approach is the right path,” Philadelphia Fed leader Patrick Harker told Reuters on Aug. 22.
Williams also said in her speech that easing inflation pressures are likely to see inflation moderate to an increase of 2.25% this year and just over 2% next year.
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