New York Fed President John Williams said on Friday that it is ‘appropriate’ for the Federal Reserve to begin easing monetary policy. Governor Christopher Waller said it is ‘important’ to begin this process by the end of the month.
The central bank’s Federal Open Market Committee raised its benchmark interest rate by 525 basis points between March 2022 and July 2023 to combat inflation. Since then, however, it has kept its monetary policy steady, with the last pause in July 2024.
‘With the economy in balance and inflation on track for 2 per cent, it is appropriate to reduce the degree of policy tightening by lowering the target range for the federal funds rate,’ Williams told the Council on Foreign Relations in New York. ‘Labour market conditions are no longer exceptionally tight.’
As president of the New York Fed, Williams is a permanent voting member of the FOMC.
Last month, Fed Chairman Jerome Powell indicated that ‘the time has come’ to ease monetary policy, although the timing and magnitude of rate cuts will depend on the data. On Wednesday, Atlanta Fed President Raphael Bostic commented that the FOMC cannot wait for inflation to fall to 2% before it starts cutting rates, as this could cause ‘disruptions in the labour market’.
On Friday, official data showed that the US economy created fewer jobs than expected in August, while the unemployment rate declined. Williams’ statement was based on data available as of Thursday.
The odds of a 25 basis point cut in interest rates on September 18 rose to 73% on Friday from 60% on Thursday, while the probability of a more aggressive 50 basis point reduction fell to 27% from 40%, according to CME’s FedWatch tool.
Waller also said on Friday that ‘the time has come’ to cut the policy rate on September 18, amid continued gains in inflation and moderation in the labour market. ‘A series of reductions is likely to be appropriate,’ Waller said at the University of Notre Dame, Indiana, adding that deciding the pace of cuts will be a challenge.
‘Today’s employment report follows the long-term pattern of a cooling labour market, consistent with moderate growth in economic activity,’ Waller commented. ‘I don’t think the economy is in a recession or necessarily heading into one.’
Williams forecasts GDP growth of between 2% and 2.5% by 2024, with an unemployment rate of 4.25%. He also expects headline personal consumption expenditure inflation to moderate to around 2.25% in 2024 and to be close to 2% next year. However, it warned of uncertainties related to a possible further weakening of the US labour market, a significant slowdown in global growth and a potentially bumpy disinflation process.