NY Fed’s Williams, Others Hint at Growing Likelihood of Sept. 17 Rate Cut
- Williams Puts More Weight on Downside Job Risks than Upside Inflation Risks
- Williams: Must Move Funds Rate Toward Neutral, But Gives No Time Frame
(MaceNews) – By putting more emphasis on risks to full employment than on inflation threats, New York Federal Reserve Bank President John Williams seemed to lend his considerable weight to a tentative interest rate cut in the near future Thursday.
The vice chair of the Federal Open Market Committee said the Fed’s policymaking body will likely need to move “toward a more neutral stance over time,” but stopped short of signaling a move at the FOMC’s mid-September meeting. Markets see overwhelming odds of a 25 basis point rate cut in September.
Williams said the current “modestly restrictive stance” remains “appropriate” for now, but he gave hope for a near-term rate cut by pointing to spreading signs of labor market “cooling” and by downplaying the longer range impact of higher tariffs on inflation.
Williams, speaking in a “fireside chat” hosted by the Economic Club of New York, said tariffs have increased goods prices in the short run, but said he is “not seeing that spilling over” into broader inflation over the longer run. And he said “anchored” inflation expectations should help the Fed prevent that from happening as it strives to get inflation down to its 2% target.
On the other side of the Fed’s dual mandate, he said “downside risks to employment have increased.” And he added, “my concern is that somehow a dynamic sets in that labor market cools more than would be desirable.”
Williams said the funds rate is “significantly above” what he estimated to be a roughly 3% “neutral” level and said it would need to fall closer to that level, but he did not say how soon he thinks the FOMC should act to do that.
Williams comments built on remarks by other Fed officials which showed varying degrees of movement toward a resumption of monetary easing after a nine-month hiatus. There is very little indication, however, that the initial rate cut will be larger than 25 basis points – unlike last September, when the FOMC slashed the funds rate by twice as much.
St. Louis Federal Reserve Bank President Alberto Musalem, who until recently was holding back from supporting near-term rate cuts, suggested he is now a bit more ready to support a modest rate cut Wednesday morning. The FOMC voter did not voice full-throated support for cutting rates, but acknowledged rising “downside risks” to the “maximum employment” side of the Fed’s dual mandate.
Similar sentiments were voiced by Atlanta Fed President Raphael Bostic in an essay released by his bank Wednesday, although he continued to limit the amount of easing he thinks will be needed.
On the other hand, Minneapolis Fed President Nell Kashkari, who in the recent past has openly advocated at least two 2025 rate cuts, sounded more ambivalent Wednesday. While there is “room” for rates to decline closer to “neutral,” he said the FOMC has to be “very careful” not to “overdo” either monetary easing or monetary restriction.
Meanwhile, Fed Governor Christopher Waller, one of two governors who cast rare dissents in favor of immediate rate cuts at the July 30 FOMC meeting, reiterated his support for multiple rate cuts at the upcoming meeting and beyond.
Williams’ remarks come in wake of discouraging labor market indicators ahead of Friday’s August employment report, as the Labor Department's Job Openings and Labor Turnover Survey (JOLTS) showed job openings dropping for a second straight month in July by a greater than expected 176,000.
The Fed’s “beige book” survey of economic conditions around the country, findings of which will be reviewed by the FOMC, found “little or no net change in overall employment levels” in 11 of the 12 Fed districts, but 7 of the districts “noted that firms were hesitant to hire workers because of weaker demand or uncertainty. Moreover, contacts in two Districts reported an increase in layoffs, while contacts in multiple Districts reported reducing headcounts through attrition….”
Labor market softening continued in August, according to management services firm ADP, which reported Thursday morning that the economy added a much fewer than expected 54,000 private sector jobs last month.
The latest comments by Fed officials suggest building momentum for at least a modest rate cut at the FOMC’s Sept. 16-17 meeting.
When the FOMC last gathered on July 30 it left the funds rate in a target range of 4.25% to 4.5%, where it had been since lowering its policy rate by 100 basis points over the last three meetings of 2024.
Following the July announcement, Chair Jerome Powell equivocated about rate cuts, although he allowed for possible easing “if you came to the view that the risks of the two (price stability and maximum employment) were more in balance.”
But after the Labor Department reported a sharp slowing of payroll gains to just 73,000 in July, coupled with a staggering 258,000 downward revision to May and June payrolls, Powell changed his rhetoric. In a keynote address at the Kansas City Fed’s annual Jackson Hole symposium, he opened the door to near-term rate cuts more explicitly, despite unfavorable inflation data.
“(W)ith policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” he said, after pointing to spreading signs of labor market softness. Powell’s comments were celebrated on Wall Street, although some regretted that he seemed to be bowing to pressure from President Trump.
Since then, comments from Fed officials have served to amplify expectations for a Sept. 17 rate cut, although support for cuts remains uneven. Calls for easing have become more assertive in some cases. In other cases, calls for “patience” have given way to acknowledgments that policy adjustments must be considered to take into account risks to full employment.
Williams, who had not previously leaned toward easing, continued to speak cautiously Thursday, but with a definite tilt toward lower rates.
He began his prepared remarks by noting that real GDP growth slowed a full percentage point from last year’s 2.5% pace in the first half, which he attributed in part to “the sizable increase in tariffs (which) reduce both the productive capacity of the economy and demand.”
The slowing of GDP growth, in turn, has caused “a gradual cooling in labor market conditions” and a “gradual slowing of wage growth.” He cited “a notable slowdown in payroll employment growth.”
Williams, one of Powell’s top lieutenants, said “the labor market is currently in balance and not adding to inflationary pressures,” and he said, “the gradual cooling in the labor market is consistent with the slowing in overall economic growth and my assessment of monetary policy being modestly restrictive.”
As for inflation, Williams said “there are clear signs that tariff increases are affecting consumer prices,” but he said “the realized aggregate effects of tariffs so far have not been as large as expected earlier in the year.”
Estimates of “the average effective tariff rate” range between 15 and 20 percent, but that is “well short of the increase implied by a straight read of the announced tariffs, he observed.
“Fortunately, I am not seeing signs of amplification or second-round effects of tariffs on broader inflation trends,” he added.
Williams said he expects tariffs will boost overall prices between 1 and 1-1/2 percent through the first half of next year,” but he conceded ‘there is a great deal of uncertainty about these effects.”
He defended the FOMC’s decision to hold the funds rate steady in July as “appropriate” as we collect more data, “given that inflation has remained above our 2% target while the labor market has been generally consistent with maximum employment.”
However, looking ahead, Williams said, “if progress on our dual mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time.”
He said the FOMC will face a “delicate balancing of risks …. On the one hand, we need to keep the labor market in balance to ensure that the effects of tariffs do not spill over into a longer-lasting broad increase in inflation. On the other hand, maintaining a stance of “too restrictive policy for too long” could increase risks to our maximum employment mandate.”
Adding to the case for eventual rate cuts, Williams said he “expect(s) the combined effects of trade and immigration policies and associated uncertainty to continue to weigh on growth.” And “with this slowdown in growth, I expect the unemployment rate to gradually rise to about 4-1/2 percent next year.”
He said he expects PCE inflation to come in between 3 and 3-1/4 percent this year, before declining to around 2-1/2 percent next year, and reaching 2 percent in 2027.”
Williams continued in much the same vein when responding to questions. “In the world of risk management, some of the downside risks to the employment side of the mandate have increased…,” he said, while on the other side, “tariffs are increasing short-term inflation.”
But “we’re not seeing that spilling over to broader inflation,” he continued, adding that “the employment risks are a little higher, and the inflation risks are a little lower.”
The FOMC’s task will be to “get those risks as balanced as we can,” he said.
Queried about his main concerns, Williams responded, “My concern is that somehow a dynamic sets in that the labor market cools more than would be desirable.”
He sounded more sanguine about the inflation outlook, saying, “I view the overall trend in services inflation as being favorable,” while wage and compensation” are consistent with “an economy normalizing and moving toward 2%.”
Williams said he and his fellow policymakers will “do our best to do our part” to control “let tariff effects pass through (and) make sure inflation expectations stay anchored” so that inflation will “not be persistent.”
Asked about the neutral rate, Williams said monetary policy is focused more on an analysis of the balance of risks to the economy, but said that if neutral rate is around 3%, “right now we’re significantly above that.” So t he funds rate must “eventually go...lower than we are today.”
The day before, Musalem said the economy is “near full employment,” but “with risks tilted to the downside,” and he warned, “With the pace of hiring low, any increase in layoffs could produce a more substantial labor market weakening…”
“Recent data have further increased my perception of downside risks to the labor market,” he added in remarks to the Peterson Institute in Washington, D.C.
Also significantly, Musalem seemed to dial back inflation concerns. Although he noted that “core inflation is running closer to 3% than to the Fed’s 2% target,” Musalem said he “expect(s) the effects of tariffs will work through the economy over the next two to three quarters and the impact on inflation will fade after that….”
“Below-trend real GDP growth and stable longer-term inflation expectations should limit the persistence of inflation,” he continued. “I expect inflation will resume convergence toward 2% in the second half of 2026.”
Adding a caveat, Musalem said “there is considerable uncertainty, and I perceive a reasonable possibility that above-target inflation could be more persistent.”
The FOMC voter went on to say “the current modestly restrictive setting of the policy rate is consistent with today’s full employment labor market and core inflation nearly one percentage point above the Fed’s 2% target.”
But he qualified that statement by saying, “When the maximum employment and price stability goals are not complementary, it is important to take a balanced approach. This means appropriately weighing the probability of missing on each goal, the potential size of each miss, and the different time horizons needed to return employment and inflation to levels consistent with the Fed’s dual mandate.”
“Pursuing a balanced approach requires care,” Musalem continued. “For example, putting most of the weight on the labor market goal runs a risk of unwarranted or excessive policy easing, causing a further steepening of the yield curve, a rise in the term premium or an increase in inflation expectations. Any of those potential outcomes could do more harm than good to the labor market and contribute to more persistent above-target inflation.
However, he added, “At the same time, putting most of the weight on the inflation goal runs the risk of not providing enough support to maintain a full employment labor market at a time when downside risks have risen.”
Bostic, who is not voting this year, cited tariff-related inflation risks, but suggested they may not persist, and he agreed that employment risks have also risen, justifying at least a modest amount of monetary easing. He was vague about the timing of rate cuts.
“I continue to believe that the effects of tariffs on consumer prices won’t
fade fast, and in fact will not fully materialize for some months,” he continued, noting that business leaders’ “expectations of their own future prices have increased meaningfully since the end of 2024.”
However, Bostic added, “One nuance that has changed is that a majority of firms no longer expect to pass through to prices all the tariff cost increases. So, the ultimate impact on consumers might be more muted than it appeared a few months ago.” And he said “consumer inflation expectations...have not risen too worryingly.”
As for the labor market, he said it is “cooling, not collapsing,” but “the labor market has cooled sufficiently that the risks to the two mandated goals are likely coming closer to balanced…”
“Nevertheless,” Bostic went on, “I do not think it is unambiguously clear that the
labor market is weakening materially relative to our mandated objectives. For one, we
are not hearing alarming signals from business contacts….”
“If labor demand and labor supply are both slowing such that the unemployment rate is stable, then the labor market has not meaningfully weakened and, in fact, remains near full employment,” he elaborated. “In other words, we are still close to the Committee’s maximum employment objective.”
But Bostic said he is “not completely sanguine about employment. Signs of cooling bear scrutiny, as history tells us that the labor market can turn quickly and decisively.”
The 0.2 percentage point rise in the three-month moving average of unemployment over the past 12 months is “not a shrieking alarm bell. But this bears watching,” he added.
Bostic ended by saying that, after several years in which upside inflation risks predominated, “risks to the employment mandate have increased such that the relative risks are more balanced….”
“I believe that, while price stability remains the primary concern, the labor market is slowing enough that some easing in policy—probably on the order of 25 basis points—will be appropriate over the remainder of this year,” he concluded.
Kashkari, who, if anything, had hitherto sounded more dovish than Musalem, seemed more noncommittal Wednesday afternoon at a Minnesota Women’s Economic Roundtable.
He said the Fed still has “a lot of work to do” to bring down “too high” inflation, but said “the labor market is showing signs of cooling.” He called that combination “tricky” for policymakers.
Kashkari, another non-voter, said the combination of slower growth, cooling labor markets, slowing wage growth and reduced inflation suggests that the Fed seems to be “achieving that soft landing.”
But citing tariff effects on prices, he said, “The debate is whether (inflation) is transitory or more persistent.”
Kashkari asserted, “I’m in the camp that we need to kind of watch this before we reach any firm conclusions.”
Further explaining his perspective on monetary policy, Kashkari said, “(W)e want to keep the economy and keep the labor market strong.. But at the same time, we’ve got to get inflation all the way back down.”
“So the scenario we’re in right now of a labor market that is cooling …. and inflation that is running too hot is a very difficult situation for a central bank, because we have one tool,” he continued. “Our one tool can push down inflation and the labor market. Or it can push up inflation and the labor market. So now we’re at this touchy area where we have to be very careful that we don’t overdo it one way or the other…”
By contrast, on Aug. 6, Kashkari explicitly called for two 2025 rate cuts. "The economy is slowing, and that means in the near term it may become appropriate to start adjusting," he told CNBC, adding that two 25 basis point cuts by the end of the year "seems reasonable to me."
Waller reaffirmed his strong support for a Sept. 17 rate cut in a television appearance Wednesday, reiterating remarks he had made in a Friday address.
"I've been clear that I think we should be cutting by the next meeting," Waller said. "The labor market has come in much softer ... and you want to get ahead of having the labor market go down because usually when the labor market turns bad, it turns fast in a nonlinear fashion, it doesn't just kind of creep up."
Waller foresees multiple cuts over the next three to six months to get to neutral.
And there have been other indications that momentum for a policy shift has mounted. Last Friday, in an unusual move, San Francisco Fed President Mary Daly issued a brief, special statement declaring, “It will soon be time to recalibrate policy to better match our economy….I think tariff-related price increases will be a one-off. It will take time before we know that for certain. But we can't wait for perfect certainty without risking harm to the labor market.”
Meanwhile, in Washington, Stephen Miran, President Trump’s Council of Economic Advisors chair, who he nominated to fill a Federal Reserve Board vacancy left by the resignation of Gov. Adriana Kugler, pledged to uphold the Fed’s independence in testimony at a Senate Banking Committee confirmation hearing.
"In my view, the most important job of the central bank is to prevent depressions and hyperinflations," Miran told the panel. "Independence of monetary policy is a critical element for its success. The Federal Open Market Committee is an independent group with a monumental task, and I intend to preserve that independence and serve the American people to the best of my ability."
Unresolved as yet is Trump’s “firing for cause” of Gov. Lisa Cook, an appointee of President Joe Biden, who has been accused of mortgage fraud. If Cook is unsuccessful in her legal suit to retain her job, Trump would have an opportunity to fill another board vacancy, enhancing his ability to influence rate levels.