– But Williams, Waller Won’t Say Size or Pace of Rate Cuts
By Steven K. Beckner
(MaceNews) – Two top Federal Reserve policy-makers strongly signaled Friday that the Fed will be cutting short-term interest rates for the first time since March 2020 when its rate-setting Federal Open Market Committee meets in mid-September.
However, neither New York Federal Reserve Bank President John Williams nor Fed Governor Christopher Waller gave any clear indication about the size of the imminent rate cut or about the amount or frequency of subsequent adjustments.
Williams said the economy has moved into “equipoise” in terms of the balance between the Fed’s goals of price stability and maximum employment. Therefore, “it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate.”
But Williams said the economic outlook is too uncertain to lay out a planned schedule of rate cuts.
Waller declared that “the time has come” to lower the funds rate, given “continuing progress on inflation and moderation in the labor market,” and he said “a series of reductions” will likely be needed,
But like Williams, Waller declined to say how much rates should be cut in the future. He said he is “open-minded” and will support more or less rate reduction depending on what incoming economic data show.
The officials were speaking less than two weeks ahead of the FOMC’s Sept. 17-18 meeting, when the Fed’s policymaking body is expected to begin cutting the federal funds rate, after holding it in a target range of 5.25% to 5.50% since July 2023. Prior to that, the FOMC had raised the funds rate 525 basis points to combat inflation after holding it near zero for two years through March 2022 to counter economic fall-out from the Covid pandemic.
Their comments came on a morning when the Labor Department released a mixed August employment report. Although the unemployment rate ticked down a tenth to 4.2%, non-farm payroll gains were a weaker than expected 142,000. Last Friday, the Commerce Department reported that the price index for personal consumption expenditures (PCE) rose 0.2% in July, leaving the Fed’s favorite inflation gauge up 2.5% from a year earlier. The core PCE, which the Fed watches most closely, rose a similar amount and was up 2.6% on a 12-month basis. The core PCE rose at an annualized 2.0% for the month.
Williams, the FOMC vice chairman, left little doubt about the outcome of the upcoming FOMC meeting. After noting that PCE inflation has fallen from 7% to 2 ½% while labor markets have “cooled,” he asserted that the time has come to start easing monetary policy.
“The accumulated evidence has increased my confidence that inflation is moving sustainably toward 2%,” he told the Council on Foreign Relations.
“The current restrictive stance of monetary policy has been effective in restoring balance to the economy and bringing inflation down,” Williams continued. “With the economy now in equipoise and inflation on a path to 2%, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate.”
“This is the natural next step in executing our strategy to achieve our dual mandate goals,” he went on. “Looking ahead, with inflation moving toward the target and the economy in balance, the stance of monetary policy can be moved to a more a neutral setting over time depending on the evolution of the data, the outlook, and the risks to achieving our objectives.”
Elaborating in response to questions, Williams said the Fed’s dual mandate goals were far apart, forcing the FOMC to be “very focused on inflation,” but “now that unemployment is in the low 4s and inflation is 2 ½%, the goals are much closer,” allowing for a less restrictive monetary stance.
“The situation we’re in, the two goals are closer to what we’re trying to achieve,” he said. “We just have to try to keep that” balance.
Williams added that the FOMC must continue to “focus on getting inflation back to 2%” because “we’re not there yet.”
When asked how rapidly the FOMC can or should return the funds rate to “neutral,” he demurred.
Williams, who is renowned for his work on the concept of the real equilibrium short-term interest rate or r*, said he does not regard the amount and speed of rate cuts as a matter of the level of r* and real interest rates, but more a matter of how an uncertain economic outlook evolves in coming months.
“Exactly what the path of rates will be has to be driven by the data,” he said. “I’m not thinking one speed or another .… It has to be driven by the data, the balance of risks.”
Williams noted the Fed will be publishing a revised set of funds rate projections by FOMC participants as part of the quarterly Summary of Economic Projections on Sept. 18 and said this will give “t he base view of how my colleagues are thinking about that.”
But he emphasized that the size and frequency of rate cuts will have to be “data dependent.”
In the last SEP, released June 12, FOMC participants projected the funds rate will end 2024 at a median 5.1%, implying just one 25 basis point cut to a target range of 5.0-5.25%. But markets are now hoping for at least three rate cuts before the end of the year, which would be in line with what Fed officials were projecting in their March SEP.
Regarding the employment report, Williams said, “the data today is roughly consistent with what we’ve been seeing – a slowing economy and a cooling off of the labor market.” He said a broad array of indicatos have shown the labor market “moving closer to balance” between supply and demand and said he wants for it to “ stay in balance.”
Waller was more reluctant than others to ease policy until fairly recently, but if anything he sounded somewhat more emphatic about the need to do so now.
“Considering the achieved and continuing progress on inflation and moderation in the labor market, I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting…,” he told an audience at Notre Deme University, where he formerly taught.
“Furthermore, I do not expect this first cut to be the last,” Waller continued. “With inflation and employment near our longer-run goals and the labor market moderating, it is likely that a series of reductions will be appropriate.”
“I believe there is sufficient room to cut the policy rate and still remain somewhat restrictive to ensure inflation continues on the path to our 2% target,” he added.
Waller said it will be “challenging” to determine the appropriate pace of rate cuts.
On one hand, he said, “choosing a slower pace of rate cuts gives time to gradually assess whether the neutral rate has in fact risen, but at the risk of moving too slowly and putting the labor market at risk.”
On the other hand, he said “cutting the policy rate at a faster pace means a greater likelihood of achieving a soft landing but at the risk of overshooting on rate cuts if the neutral rate has in fact risen above its pre-pandemic level. This would cause an undesired loosening of monetary policy.”
For now, Waller said, “it is important to start the rate cutting process at our next meeting.”
Beyond that, the FOMC will have to be “data dependent,” he said.
“If subsequent data show a significant deterioration in the labor market, the FOMC can act quickly and forcefully to adjust monetary policy,” he said, adding that he is “open-minded about the size and pace of cuts, which will be based on what the data tell us about the evolution of the economy, and not on any pre-conceived notion of how and when the Committee should act.”
“If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings,” Waller went on. “If the data suggests the need for larger cuts, then I will support that as well.”
Waller took the August employment report, along with other recent labor market indicators, in stride, saying “the data that we have received in the past three days indicates to me that the labor market is continuing to soften but not deteriorate…”
He said Friday morning’s jobs report “supported the story of ongoing moderation in the labor market.” He dismissed the amount of reductions in payroll gains, saying they are still just “a bit below what I see as the breakeven pace for job creation that absorbs new entrants to the workforce and keeps the unemployment rate constant.”
Although the unemployment rate has risen more than the so-called “Sahm rule” regards as healthy, he said that “doesn’t necessarily mean we are entering a recession.”
Waller said “most of the increase in the unemployment rate is from workers entering the labor force and not finding jobs right away. So, the recent rise in the unemployment rate appears to be more of a supply-side-driven phenomenon, not demand driven.”
Nevertheless, he said he does “see some downside risk to employment that I will be watching closely.” After reducing using monetary restraint to reduce demand primarily by reducing job vacancies instead of driving up unemployment, he said the Fed is “now at this kink point” where “we have to be careful about how much restriction we put on (the labor market).”
But Waller added, “at this point, I believe there is substantial evidence that the economy retains the strength and momentum to keep growing, supported by an appropriate loosening of monetary policy.”
Williams and Waller gave no indication when the FOMC will suspend its so-called “quantified tightening,” i.e., the process of shrinking the Fed’s balance sheet.