MNI: Williams Says It's Time For Fed To Start Lowering Rates

Federal Reserve Bank of New York President John Williams said Friday it is now appropriate to start lowering interest rates to a more neutral setting over time, now that inflation is moving to the central bank's 2% target and the labor market is now roughly in balance.

"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," Williams said in prepared remarks.

"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," he said in a speech to the Council on Foreign Relations.

Measures of underlying inflation, like core PCE inflation and the New York Fed’s Multivariate Core Trend inflation show a sizable decline over the past two years to around 2.5% today and the overall inflation rate back is back down closer to our 2% longer-run goal, he said. (See: MNI POLICY: Fed Prefers Gradual Rates Easing If Jobs Allow)

LABOR MARKET BALANCE

Acknowledging that the unemployment rate has risen by nearly a percentage point from its very low reading in early 2023, Williams said it remains relatively low by historical standards. Some of the increase reflects a cool-down from an overheated state and it has occurred in the context of a strong increase in labor supply, rather than from elevated layoffs, he said.

Most measures of the labor market are "more consistent with the good labor market that existed in the period before the pandemic," he said. A wide range of data "indicate that the labor market is now roughly in balance and therefore unlikely to be a source of inflationary pressures going forward."

The New York Fed chief said he expects GDP growth this year to be around 2 to 2.5%, the unemployment rate at the end of this year to be around 4.25% and thereafter decline to its longer-run level of 3.75%, and overall PCE inflation to moderate to around 2.25% this year and 2% next year.

Williams also said the QT process is "going smoothly and as planned, and the level of reserves remains well above ample."