Federal Reserve "third-in-command" Williams: Supports further interest rate cuts this year and does not believe the economy is on the brink of recession

The Federal Reserve's "third-in-command," New York Federal Reserve Bank President John Williams, has clearly stated his support for further interest rate cuts this year to address the potential risk of a sharp slowdown in the labor market.

On Thursday, Williams said, "The risk of further slowing in the labor market is something I am very concerned about." He believes that if the economy develops as expected—inflation rises to around 3% and the unemployment rate slightly increases to above the current 4.3%—he would support "a rate cut this year."

He also stated that he does not believe the U.S. economy is on the brink of recession. The inflation outlook is not as dire as it was earlier this year. A weak labor market will help curb inflation.

Williams' remarks echo the general expectations of the market. Pricing in federal funds futures shows that investors expect the Federal Reserve to cut rates again in the remaining two meetings of this year (October and December). Tonight at 20:30, Powell will deliver a pre-recorded opening speech at a community banking conference hosted by the Federal Reserve Board, which may provide signals regarding the U.S. economy.

Gradual Cooling of the Job Market Triggers Policy Adjustment Considerations

Williams elaborated on the Federal Reserve's assessment of the current employment market conditions. He stated that the labor market has shown a gradual cooling trend over the past year, and although the unemployment rate has only risen by a few tenths of a percentage point, job vacancies continue to decline, and the turnover rate has also dropped to a low level.

"We have seen the job market gradually cool over the past year, but this cooling has not triggered concerns about an impending recession or sharp slowdown," Williams said. He noted that the latest indicators from September show that the overall job market continues to cool moderately, with no signs of accelerated deterioration.

Williams is particularly focused on the reasons for the slowdown in job growth, acknowledging that it is difficult to distinguish whether this is due to reduced demand for new employees or a decline in the supply of available labor. He mentioned that the slowdown in labor supply growth is mainly due to reduced immigration and deportations, but there are also suppressive factors affecting labor demand.

Inflation Pressures Ease but Vigilance is Still Required

Regarding inflation, Williams believes that tariffs have indeed pushed up the prices of imported goods, directly impacting overall inflation, but this effect is smaller and more dispersed than previously expected. He estimates that tariffs have raised the inflation rate by 0.25 to 0.5 percentage points.

"The overall level of tariffs has stabilized at a high level, but I believe this has eliminated some of the upside risks to inflation," Williams stated, noting that core inflation seems to be gradually approaching the 2% target, with improvements in housing costs being particularly evident.

Williams emphasized that he has not seen signs of second-round effects or amplification effects of tariffs on inflation. Inflation expectations remain stable, and supply chain indicators are generally at normal levels. He believes that as the labor market no longer adds inflationary pressure and wage growth slows, this will help reduce inflation in the service sector.

Monetary Policy Stance Remains Moderately Tight

Williams stated that despite the relatively low unemployment rate, stable consumption, and loose financial conditions, monetary policy remains moderately tight:

"When I think about the stance of monetary policy and whether it is tightening — I still believe it is moderately tightening — I view it as a reflection of the economy relative to our maximum employment and price stability goals."

He pointed out that although inflation remains above target, the trend of core inflation moving closer to the target over the past year indicates that monetary policy has generally exerted downward pressure on inflation. Williams believes that the continued moderate cooling of the labor market and the reduced risks of inflation support the Federal Reserve's decision to adjust policy at its recent meeting.

Williams expressed support for further rate cuts this year but emphasized that this will depend on the evolution of economic data. His baseline expectation is that inflation will rise slightly to around 3%, and the unemployment rate will gradually increase slightly.

Commitment to Federal Reserve Independence

In the face of external doubts about the independence of the Federal Reserve, Williams defended the central bank's independence. He emphasized that his more than 30 years of experience at the Federal Reserve has given him a deep understanding of the importance of an independent central bank.

"From experience, we see that independent central banks are better able to achieve the goals that the people and the government wish to achieve. That is why countries around the world grant their central banks the independence to act in fulfilling their responsibilities while being accountable to elected officials."

He reiterated that all staff at the Federal Reserve bear the responsibility of maintaining the independence of the Federal Reserve System, focusing on a relatively narrow but extremely important task — helping to guide the economy toward maximum employment and price stability. Williams emphasized that the Federal Reserve's decisions are based entirely on data analysis, not political considerations.

When asked if he would continue to serve until 2028, Williams clearly stated:

"Yes, as long as I am allowed, I will continue to serve."