Fed's Williams Signals Support for Further Rate Cuts Amid Labor Market Concerns

Fed's Williams Sees Need for Further Rate Cuts

John Williams, the president and CEO of the Federal Reserve Bank of New York, indicated that he would favor cutting interest rates again this year, even though inflation has remained above the Fed’s 2% target in recent months. This view is based on concerns about a labor market showing signs of slowing, and Williams wants to prevent these issues from worsening.

In an interview with The New York Times, Williams clarified that he doesn’t believe the U.S. economy is on the brink of recession. However, he pointed out that the slowdown in monthly job growth, coupled with other indications that businesses are becoming more hesitant in hiring, are developments worth paying attention to.

The Fed is facing a dilemma: it doesn’t want to contribute to weakening the labor market, but it also wants to avoid fueling inflation, especially since President Trump's tariffs have already caused prices to rise.

However, Williams believes that the Fed has the flexibility to support the labor market, as the outlook for inflation doesn’t seem as dire as it did earlier this year. He noted that Trump’s tariffs have raised the prices of some consumer goods, but he expects the impact of tariffs on inflation to fade over time, even with Trump imposing new tariffs on products like furniture and drugs.

"The risk of further slowing in the labor market is something I’m very focused on,” Williams adds. He indicates that if things proceed as expected, and inflation rises to around 3% and the unemployment rate rises slightly above its current level of 4.3%, he would support “cutting interest rates this year, but we have to see clearly what that means.”

Independence in Decision-Making Amid Data Challenges

Williams stressed that even if a government shutdown leads to a dearth of official data, he wouldn’t hesitate to take action at upcoming Fed meetings. The U.S. government shutdown has entered its second week, causing the release of the nonfarm payrolls report, which was due last week, to be delayed. If Congressmen fail to reach an agreement in time, the Bureau of Labor Statistics may also have to postpone the release of the CPI report scheduled for next Wednesday.

While acknowledging that government data is the “gold standard for macroeconomic data,” Williams noted that private sector providers and surveys from the Fed and outside sources (such as the Conference Board or the Institute for Supply Management) also provide valuable information.

He added, “We have a pretty good sense of what’s going on, especially in the aspects that are most important to us, which is maximum employment and price stability.” Here he is referring to the Fed’s dual goals of achieving a healthy labor market and low, stable inflation.

Williams mentioned that it’s hard to predict how much of an impact the government shutdown will have on economic growth, and that his main focus is on the possibility of layoffs in government sectors, including at the regional and local levels.

Discussions Within the Fed on the Pace of Rate Cuts

Following the first interest rate cut of the year last month, Fed officials are currently debating the pace of future rate cuts. Policymakers will hold two more meetings this year, with the next one scheduled for October 28-29.

They cut interest rates last month by 25 basis points to a range of 4% to 4.25%, describing it as “risk management,” a view that Williams shares.

Similar to many other officials, including Powell, he believes that the Fed’s policy setting is “modestly restrictive,” meaning that borrowing costs are sufficient to curb economic activity, but not enough to cause a total collapse. Although consumer spending accounts for about 70% of the $23 trillion economy, it remains relatively resilient, though wealthier consumers have far more flexibility than lower-income households. Companies may not be hiring much, but they’re also not laying off workers, which is helping keep the unemployment rate relatively stable. Stock markets have also soared to new highs, while government and corporate bond yields have fallen. This backdrop has led some Fed officials to conclude that their policy setting isn’t imposing much constraint on the economy. They seem more concerned about persistent price pressures, and therefore less inclined to cut interest rates further.

However, Williams argues that weakness in the labor market will help curb inflation, even if price pressures for services remain high. He also emphasizes that stock markets aren’t a good representation of how restrictive interest rates are, but may rather reflect “real-world factors,” such as investors’ large bets on artificial intelligence.

Williams says, “I don’t see any second-round effects or factors that could amplify the impact of tariffs on inflation.” He adds, “There is more downside risk facing the labor market and employment, which mitigates some of the upside risk to inflation.”

He says it is appropriate to get interest rates back to a “neutral” level, meaning the level that neither speeds up nor slows down growth over the long term. Most officials estimate this level at around 3%, or 1% when adjusted for inflation. But Fed officials' views vary. Williams has previously estimated the after-inflation interest rate to be between 0.75% and 1%.

Focus on Achieving Goals While Maintaining Independence

Williams hasn’t expressed any urgency to cut interest rates quickly and has made it clear that the Fed is committed to getting inflation back to its 2% target.

“We haven’t forgotten that. We’re still very focused on inflation, but we want to make sure that we’re achieving our two goals as best we can.” This means getting inflation back to its target level and working to “minimize the risk of a more abrupt cooling of the labor market.”

He echoes Powell’s warning that “there are no risk-free paths,” but says that the Fed is working to “widen that path.”

Williams also addressed Trump’s series of attacks on the Fed, where the latter has been relentlessly demanding substantial interest rate cuts. Williams acknowledges that “political figures have their views,” while emphasizing the importance of the Fed’s independence from the White House, adding that “it’s very important for us right now to do our jobs as well as possible.”

Treasury Secretary Besnat has also accused the Fed of “expanding its mandate” and distorting financial markets through its quantitative easing program, which involved large-scale purchases of government bonds and other assets in the wake of the last two major financial crises.

Williams defended the use of these tools, calling them merely an “extension of monetary policy,” and warning that economic conditions would have been worse without them.

As part of his campaign to exert pressure, Trump has also sought to exert more direct influence on the Fed by appointing those who agree with his policy views.

After Kugler’s abrupt resignation in August, he was able to appoint Milan, and since then Trump has sought to create another vacancy on the board by firing Cook, arguing that she was involved in mortgage fraud. The Supreme Court will hear Cook’s lawsuit against her dismissal in January and has allowed her to remain on the board while the case is pending.

Williams, 63, says he plans to remain in office until his retirement in 2028. Asked about Trump's attempts to undermine the Fed's independence and the scrutiny the central bank faces for its non-adversarial response, Williams emphasized that his focus is entirely on analyzing the data. “We aren’t political creatures,” he said.