Proponents of the Federal Reserve cutting interest rates in December gained a powerful backer on Friday, when a top official said the central bank had scope to lower borrowing costs “in the near term.”
John C. Williams is president of the Federal Reserve Bank of New York and a close ally of Jerome H. Powell, the Fed chair. He emphasized in a speech that he was more concerned about the labor market weakening than that rising inflation because of President Trump’s tariffs would morph into a more persistent problem.
“My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat,” he said at an event in Santiago, Chile. “Underlying inflation continues to trend downward, absent any evidence of second-round effects emanating from tariffs.”
Mr. Williams affirmed that he still believes interest rates, which are in a range of 3.75 percent to 4 percent, are still “restrictive,” meaning they are weighing on economic activity. After two quarter-point cuts at the September and October meetings, the degree of restraint had lessened, but he said he still believed the Fed had room to reduce interest rates further to get to a “neutral” stance that neither revs up nor slows down growth.
“I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral,” he said.
His comments raised the odds that the Fed will follow through with a quarter-point cut when they next meet in December, which would lower interest rates to a range of 3.5 percent to 3.75 percent. Traders in federal funds futures markets now see a 65 percent chance of a reduction, up from around 45 percent before the speech.
Whether the Fed lowers rates for a third straight meeting has been subject to intense debate. Policymakers have splintered over the need to provide more relief to the economy while inflation is moving away from the Fed’s 2 percent target and the labor market is slowing.
In one camp, officials are more concerned about a vulnerable labor market than rising inflation. They include Christopher J. Waller, a Fed governor in the running to replace Mr. Powell as chair when his term ends in May. Stephen I. Miran, the newest member of the Fed’s board of governors, told Bloomberg on Friday that he would support a quarter-point cut rather than the half-point he would prefer if that meant the difference between the Fed cutting or not.
Mr. Miran has said that he believes inflation fears are overblown and the economy is at risk of a recession if the central bank does not cut borrowing costs rapidly. He dissented from the consensus and pushed for a half-point cut at each of his two meetings this year, in September and October.
In the other camp, officials worry that by cutting interest rates further, the Fed could inadvertently stoke price pressures while the labor market is relatively stable.
The debate has raged in part because there has been limited official data as a result of the longest government shutdown in history. The lapse in funding disrupted the release of crucial economic reports, including the latest labor market and inflation data.
September’s jobs report, released more than a month late on Thursday, did not resolve any differences. It showed stronger-than-expected monthly jobs growth, but the unemployment rate ticked up to a four-year high of 4.4 percent. That is the last jobs report Fed officials will see before they next vote on interest rates.
Susan M. Collins, president of the Federal Reserve Bank of Boston, said on Friday that holding interest rates steady would be “appropriate for now” because she expects inflation will stay elevated for some time. She will vote at the December meeting.
“If I were seeing evidence that the labor market were notably deteriorating, I would take that very seriously, and that certainly could justify near-term additional easing,” she said in an interview with Bloomberg. “We haven’t seen a significant unemployment change.”
Another voter, Austan D. Goolsbee., president of the Chicago Fed, said on Thursday that he was “uneasy” about “front-loading” interest rate cuts.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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