New York Fed President John Williams said Friday there is room for “further adjustment in the near term” to interest rates – sparking traders to step up their bets on a quarter-point cut at the Fed’s December meeting.
Williams argued labor market weakness still poses a bigger threat than inflation, leaving the door open for a quarter-point cut, even as analysts were split on next month’s decision following mixed jobs data.
“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” Williams said during a speech at a conference in Santiago, Chile.
“Therefore, 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, thereby maintaining the balance between the achievement of our two goals.”
The Dow Jones Industrial Average jumped 267 points, or 0.6%, after Williams’ comments and odds of a rate cut jumped to nearly 75% from 39% the previous day, according to CME FedWatch.
A day earlier on Thursday, Philadelphia Fed President Anna Paulson said that she’s approaching the December meeting “cautiously.”
“I’m still a little more worried about the labor market than I am about inflation, but I expect to learn a lot between now and the next meeting,” Paulson said during an event in Philadelphia.
“Each rate cut brings us closer to the level where policy flips from restraining activity a bit to the place where it is providing a boost,” she added. “Each rate cut raises the bar for the next cut.”
In the first significant batch of economic data since the government shutdown, employers added 119,000 jobs in September – far above expectations of 50,000, the Bureau of Labor Statistics said Thursday.
The unemployment rate, however, ticked up to 4.4% – the highest level since October 2021.
Global brokerages split on what the mixed bag of data means for next month’s interest-rate decision, though odds of a quarter-point jumped nearly 10% following the report on Thursday, according to CME FedWatch.
JPMorgan, Standard Chartered and Morgan Stanley withdrew their forecasts for a December interest-rate cut.
Analysts argued the better-than-expected jobs growth will sway officials to hold rates, especially since further labor market data will be delayed until December.
“The absence of November labor data may make it harder for doves to insist on the need for a cut,” Standard Chartered said.
Deutsche Bank, Citigroup, Wells Fargo and BNP Paribas stuck to their forecasts for a quarter-point cut, arguing the rise in unemployment supports the case for easing policy.
“A December cut is admittedly a close call, but we think the steady rise in the unemployment rate to 4.44% will be enough to encourage ‘open minded’ officials to support a cut,” Citi said.
Nomura and BofA Global Research kept their forecasts for no rate cut in December.
Still, the employment update was largely backward-looking, which some analysts claimed made it unlikely to sway Fed officials one way or another since it doesn’t paint a picture of current market conditions.
About 100,000 federal workers went off payrolls in October, likely to cause a shock to jobs data – but that month’s data is slated for a partial and delayed release in December, according to the White House.
Fed officials have been divided on whether policy is still restrictive, meaning there is room to lower rates without spiking inflation, or whether it’s not restrictive, which would make further cuts risky.
“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,” Williams said Friday.
“Underlying inflation continues to trend downward, absent any evidence of second-round effects emanating from tariffs.”
Like many other central bankers, Williams also noted that progress on inflation “has stalled” due to President Trump’s tariffs. He said long-term expectations still appear on track, though.
While the unemployment rate is “in the neighborhood” of full employment, most job gains have been in the healthcare and social assistance sectors, Paulson said Thursday.
“Historically, when job gains are concentrated in acyclical sectors like healthcare, that is a precursor to a slowdown,” she added.
She nodded to resilient consumer spending, but noted that the trend is divided by income – with higher-income households continuing to spend while lower-income consumers pull back.
“Candy sales over Halloween provide another example of how stretched some families are. Smaller bags of candy – with fewer items – sold better than larger bags that offered greater value per unit,” Paulson said. “And, at the same time, demand for higher-end chocolate is very strong.”
This story originally appeared on NYPost
